Auburn National Bancorporation 10K 2023 Annual report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549

FORM

10-K

☒

Annual report pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934.

For the fiscal year ended

December 31, 2023

☐

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from __________ to __________

Commission File Number:

0-26486

Auburn National Bancorporation, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

63-0885779

(State or other jurisdiction

of incorporation)

(I.R.S. Employer

Identification No.)

100 N. Gay Street

Auburn,

Alabama

36830

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (

334

)

821-9200

Securities registered pursuant to Section 12 (b) of the Act:

Title of Each Class

Trading Symbol

Name of Exchange on which Registered

Common Stock

, par value $0.01

AUBN

NASDAQ

Global Market

Securities registered to Section 12(g) of the Act:

None

Indicate by check mark if the registrant

is a well-known seasoned issuer, as defined in Rule 405

of the Securities Act. Yes

☐

☒

Indicate by check mark if the registrant

is not required to file reports pursuant

to Section 13 or Section 15(d) of the Act.

Yes

☐

☒

Indicate by check mark whether the registrant

(1) has filed all reports required to be

filed by Section 13 or 15(d) of

the Securities Exchange Act of 1934 during

the

preceding 12 months (or for such shorter

period that the registrant was required

to file such reports), and (2) has been subject

to such filing requirements for the past

90 days.

Yes

☒

☐

Indicate by check mark whether the registrant

has submitted electronically every Interactive

Data File required to be submitted pursuant

to Rule 405 of Regulation S-

T (§ 232.405 of this chapter) during

the preceding 12 months (or for such

shorter period that the registrant was required

to submit such files).

Yes

☒

☐

Indicate by check mark whether the registrant

is a large accelerated filer, an accelerated filer, a non-accelerated

filer, or a smaller reporting company. See the

definitions of “large accelerated filer,” “accelerated filer”

and “smaller reporting company” in

Rule 12b-2 of the Exchange Act. (Check

one):

Large Accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging Growth

Company

☐

If an emerging growth company, indicate by check mark if the registrant

has selected not to use the extended

transition period for complying with any

new or revised

financial accounting standards provided pursuant

to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant

has filed a report on and attestation

to its management’s assessment of the effectiveness of its internal

control over

financial reporting under Section 404(b)

of the Sarbanes-Oxley Act (15 U.S.C.

7262(b)) by the registered public accounting

firm that prepared or issued its audit

report.

☐

If securities are registered pursuant to Section

12(b) of the Act, indicate by check

mark whether the financial statements of

the registrant included in the filing reflect

the correction of an error to previously

issued financial statements.

☐

Indicate by check mark whether any

of those error corrections are restatements

that required a recovery analysis of

incentive-based compensation received by any

the registrant’s executive officers during the relevant recovery

period pursuant to §240.10D-1(b).

☐

Indicate by check mark if the registrant

is a shell company (as defined in Rule

12b-2 of the Act). Yes

☐

☒

State the aggregate market value of the voting

and non-voting common equity held

by non-affiliates computed by reference to the

price at which the common equity

was last sold, or the average bid and

asked price of such common equity

as of the last business day of the registrant’s most recently

completed second fiscal quarter:

47,841,697

as of June 30, 2023.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

Indicate the number of shares outstanding

of each of the registrant’s classes of common stock,

as of the latest practicable date:

3,493,674

shares of common stock as

of March 13, 2024.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the

Annual Meeting of Shareholders, scheduled

to be held May 14, 2024, are incorporated

by reference into Part II, Item 5 and

Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

PART I

PAGE

ITEM 1.

BUSINESS

ITEM 1A.

RISK FACTORS

ITEM 1B.

UNRESOLVED STAFF COMMENTS

ITEM 1C.

CYBERSECURITY

ITEM 2.

PROPERTIES

ITEM 3.

LEGAL PROCEEDINGS

ITEM 4.

MINE SAFETY DISCLOSURES

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6.

SELECTED FINANCIAL DATA

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

123

ITEM 9A.

CONTROLS AND PROCEDURES

123

ITEM 9B.

OTHER INFORMATION

123

ITEM 9C.

DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT PREVENT

INSPECTION

123

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

124

ITEM 11.

EXECUTIVE COMPENSATION

124

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS

124

ITEM 13.

CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

124

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

124

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

124

Table of Contents

PART

SPECIAL CAUTIONARY NOTE REGARDING

FORWARD

-LOOKING STATEMENTS

Various

of the statements made herein under the captions “Management’s

Discussion and Analysis of Financial Condition

and Results of Operations”, “Quantitative and Qualitative Disclosures about Market

Risk”, “Risk Factors” “Description of

Property” and elsewhere, are “forward-looking statements” within the

meaning and protections of Section 27A of the

Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,

as amended (the “Exchange Act”).

Forward-looking statements include statements with respect to our beliefs, plans, objectives,

goals, expectations,

anticipations, assumptions, estimates, intentions and future performance, and

involve known and unknown risks,

uncertainties and other factors, which may be beyond our control, and

which may cause the actual results, performance,

achievements or financial condition of the Company to be materially different

from future results, performance,

achievements or financial condition expressed or implied by such forward-looking

statements.

You

should not expect us to

update any forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking

statements.

You

can

identify these forward-looking statements through our use of words such as “may,”

“will,” “anticipate,” “assume,”

“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,”

“estimate,” “continue,” “designed”, “plan,” “point to,”

“project,” “could,” “intend,” “target” and other similar words and expressions

of the future.

These forward-looking

statements may not be realized due to a variety of factors, including, without limitation:

●

the effects of future economic, business and market conditions and

changes, foreign, domestic and locally,

including inflation, seasonality,

natural disasters or climate change, such as rising sea and water levels,

hurricanes

and tornados, COVID-19 or other health crises, epidemics or pandemics including supply

chain disruptions,

inventory volatility, and changes

in consumer behaviors;

●

the effects of war or other conflicts, acts of terrorism, trade restrictions, sanctions or

other events that may affect

general economic conditions;

●

governmental monetary and fiscal policies, including the continuing effects

of COVID-19 fiscal and monetary

stimuli, and subsequent changes in monetary policies in response to inflation, including

increases in the Federal

Reserve’s target federal

funds rate and reductions in the Federal Reserve’s

holdings of securities through

quantitative tightening; and the duration that the Federal Reserve will keep its targeted

federal funds rates at or

above current rates to meet its long term inflation target of 2%;

●

legislative and regulatory changes, including changes in banking, securities and tax laws,

regulations and rules and

their application by our regulators, including capital and liquidity requirements, and

changes in the scope and cost

of FDIC insurance;

●

changes in accounting pronouncements and interpretations, including the required

use, beginning January 1, 2023,

of Financial Accounting Standards Board’s

(“FASB”) Accounting

Standards Update (ASU) 2016-13, “Financial

Instruments – Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments,” as well as the

updates issued since June 2016 (collectively,

FASB ASC Topic

326) on Current Expected Credit Losses

(“CECL”), and ASU 2022-02, Troubled Debt Restructurings

and Vintage Disclosures,

which eliminates troubled

debt restructurings (“TDRs”) and related guidance;

●

the failure of assumptions and estimates, including those used in the Company’s

CECL models to establish our

allowance for credit losses and estimate asset impairments, as well as differences

in, and changes to, economic,

market and credit conditions, including changes in borrowers’ credit risks and payment behaviors

from those used

in our CECL models and loan portfolio reviews;

●

the risks of changes in market interest rates and the shape of the yield curve on customer

behaviors; the levels,

composition and costs of deposits, loan demand and mortgage loan originations; the

values and liquidity of loan

collateral, our securities portfolio and interest-sensitive assets and liabilities;

and the risks and uncertainty of the

amounts realizable on collateral;

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●

the risks of increases in market interest rates creating unrealized losses on our securities available

for sale, which

adversely affect our stockholders’ equity for financial reporting purposes

and our tangible equity;

●

changes in borrower liquidity and credit risks, and savings, deposit and payment behaviors;

●

changes in the availability and cost of credit and capital in the financial markets, and the types

of instruments that

may be included as capital for regulatory purposes;

●

changes in the prices, values and sales volumes of residential and commercial real estate;

●

the effects of competition from a wide variety of local, regional, national

and other providers of financial,

investment and insurance services, including the disruptive effects

of financial technology and other competitors

who are not subject to the same regulation, including capital, and supervision and examination,

as the Company

and the Bank and credit unions, which are not subject to federal income taxation;

●

the timing and amount of rental income from third parties following the June 2022

opening of our new

headquarters;

●

the risks of mergers, acquisitions and divestitures, including,

without limitation, the related time and costs of

implementing such transactions, integrating operations as part of these transactions and

possible failures to achieve

expected gains, revenue growth and/or expense savings from such transactions;

●

changes in technology or products that may be more difficult, costly,

or less effective than anticipated;

●

cyber-attacks and data breaches that may compromise our systems, our

vendors’ systems or customers’

information;

●

the risks that our deferred tax assets (“DTAs”)

included in “other assets” on our consolidated balance sheets, if

any, could be reduced if estimates of future

taxable income from our operations and tax planning strategies are less

than currently estimated, and sales of our capital stock could trigger a reduction in the amount of

net operating loss

carry-forwards that we may be able to utilize for income tax purposes;

●

the risks that our dividends, share repurchases and discretionary bonuses are

limited by regulation to the

maintenance of a capital conservation buffer of 2.5% and our future earnings

and “eligible retained earnings” over

rolling four calendar quarter periods;

●

other factors and risks described under “Risk Factors” herein and in any of our subsequent

reports that we make

with the Securities and Exchange Commission (the “Commission” or “SEC”)

under the Exchange Act.

All written or oral forward-looking statements that we make or

are attributable to us are expressly qualified in their entirety

by this cautionary notice.

We have no obligation

and do not undertake to update, revise or correct any of the forward-

looking statements after the date of this report, or after the respective dates on which such

statements otherwise are made.

ITEM 1.

BUSINESS

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company registered

with the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding

Company Act of 1956, as amended (the

“BHC Act”).

The Company was incorporated in Delaware in 1990, and in 1994 it succeeded

its Alabama predecessor as

the bank holding company controlling AuburnBank, an Alabama state

member bank with its principal office in Auburn,

Alabama (the “Bank”).

The Company and its predecessor have controlled the Bank since 1984.

As a bank holding

company, the Company

may diversify into a broader range of financial services and other business activities than currently

are permitted to the Bank under applicable laws and regulations.

The holding company structure also provides greater

financial and operating flexibility than is presently permitted to the Bank.

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The Bank has operated continuously since 1907 and currently conducts its business primarily

in East Alabama, including

Lee County and surrounding areas.

The Bank has been a member of the Federal Reserve Bank of Atlanta (the

“Federal

Reserve Bank”) since April 1995.

The Bank’s primary regulators are

the Federal Reserve and the Alabama Superintendent

of Banks (the “Alabama Superintendent”).

The Bank has been a member of the Federal Home Loan Bank of Atlanta (the

“FHLB-Atlanta”) since 1991.

General

The Company’s business is conducted primarily

through the Bank and its subsidiaries.

Although it has no immediate plans

to conduct any other business, the Company may engage directly or indirectly in a number

of activities closely related to

banking permitted by the Federal Reserve.

The Company’s principal executive offices

are located at 100 N. Gay Street, Auburn, Alabama 36830, and its telephone

number at such address is (334) 821-9200.

The Company maintains an Internet website at

www.auburnbank.com

The

Company’s website and the information

appearing on the website are not included or incorporated in, and are not part

of,

this report.

The Company files annual, quarterly and current reports, proxy statements, and

other information with the

SEC.

You

may read and copy any document we file with the SEC at the SEC’s

public reference room at 100 F Street, N.E.,

Washington, DC 20549.

Please call the SEC at 1-800-SEC-0330 for more information on the operation of the public

reference rooms.

The SEC maintains an Internet site at

www.sec.gov

that contains reports, proxy, and other

information,

where SEC filings are available to the public free of charge.

Services

The Bank offers checking, savings, transaction deposit accounts and

certificates of deposit, and is an active residential

mortgage lender in its primary service area.

The Bank’s primary service area includes the

cities of Auburn and Opelika,

Alabama and nearby surrounding areas in East Alabama, primarily in Lee County.

The Bank also offers commercial,

financial, agricultural, real estate construction and consumer loan products and other

financial services.

The Bank is one of

the largest providers of automated teller machine (“ATM”)

services in East Alabama and operates ATM

machines in 12

locations in its primary service area.

The Bank offers Visa

Checkcards, which are debit cards with the Visa

logo that work

like checks and can be used anywhere Visa

is accepted, including ATMs.

The Bank’s Visa

Checkcards can be used

internationally through the Plus

network.

The Bank offers online banking, bill payment and other electronic banking

services through its Internet website,

www.auburnbank.com

Our online banking services, bill payment and electronic

services are subject to certain cybersecurity risks.

See “Risk Factors – Our information systems may experience

interruptions and security breaches.”

The Bank does not offer any services related to any Bitcoin or other digital or crypto instruments

or stablecoins or

businesses.

Competition

The Bank had the largest share of the Auburn-Opelika MSA’s

deposits (20.1%) at June 30, 2023.

The banking business in

East Alabama, including Lee County,

is highly competitive with respect to loans, deposits, and other financial

services.

The area is served by 19 banks, 11 of which are headquartered

outside of Alabama and have 26 offices in our market.

Larger national and regional competitors that have offices

in our market include J.P.

Morgan Chase, Wells

Fargo, Truist,

PNC, Regions, Valley

National and SouthState.

The regional and national banks and bank holding companies that we

compete with have substantially greater resources, and numerous offices

and affiliates operating over wide geographic

areas.

The Bank competes for deposits, loans and other business with these banks, as

well as with credit unions, mortgage

companies, insurance companies, and other local and nonlocal financial institutions,

including institutions offering services

through the mail, by telephone and over the Internet.

As more and different kinds of businesses enter the market for

financial services, competition from nonbank financial institutions

may be expected to intensify further.

Among the advantages that larger financial institutions have over

the Bank are their ability to finance extensive advertising

campaigns, to diversify their funding sources, and to allocate and diversify their assets among

loans and securities of the

highest yield in locations with the greatest demand.

Many of the major commercial banks or their affiliates operating

in the

Bank’s service area offer services

which are not presently offered directly by the Bank,

and these other banks typically have

substantially higher lending limits than the Bank.

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Banks also have experienced significant competition for deposits from mutual

funds, insurance companies and other

investment companies and from money center banks’ offerings of

high-yield investments and deposits, including CDs and

savings accounts.

Certain of these competitors are not subject to the same regulatory restrictions as the Bank.

Selected Economic Data

The Auburn-Opelika Metropolitan Statistical Area is Lee County,

Alabama, including Auburn, Opelika and part of Phenix

City, Alabama.

The U.S. Census Bureau estimates Lee County’s

population was 180,773 in 2022, and has increased

approximately 29% from 2010 to 2022.

The largest employers in the area are Auburn University,

East Alabama Medical

Center, Lee County School System, Auburn City Schools,

Wal-Mart Distribution

Center, Aptar CSP Technologies,

Pharmavite, LLC, HL Mando America Corporation (automobile brakes and steering),

Golden State Foods and Briggs &

Stratton.

Auto manufacturing and related suppliers are increasingly important along

Interstate Highway 85 to the east and

west of Auburn.

Kia Motors has a large automobile factory in nearby West

Point, Georgia, and Hyundai Motors has a large

automobile factory near Montgomery,

Alabama.

Various

suppliers to the automotive industry have facilities in Lee

County.

The unemployment rate in Lee County was 2.4% at

year end 2023

according to the U.S. Bureau of Labor

Statistics.

Between 2010 and 2022, the Auburn-Opelika MSA was the second fastest

growing MSA in Alabama.

The Auburn-

Opelika MSA population is estimated to grow 6.6% from 2023 to 2028.

During the same time, household income is

estimated to increase 14.25%, to $69,213.

Loans and Loan Concentrations

The Bank makes loans for commercial, financial and agricultural purposes, as well as for

real estate mortgages, real estate

acquisition, construction and development and consumer purposes.

While there are certain risks unique to each type of

lending, management believes that there is more risk associated with commercial, real

estate acquisition, construction and

development, agricultural and consumer lending than with residential real estate

mortgage loans.

To help manage these

risks, the Bank has established underwriting standards used in evaluating each extension

of credit on an individual basis,

which are substantially similar for each type of loan.

These standards include a review of the economic conditions

affecting the borrower, the borrower’s

financial strength and capacity to repay the debt, the underlying collateral and the

borrower’s past credit performance.

We apply these standards

at the time a loan is made and monitor them periodically

throughout the life of the loan.

See “Lending Practices” for a discussion of regulatory guidance on commercial real estate

lending.

Our commercial real estate (“CRE”) loans, including $66.8 million of loans on owner occupied

property, as of December

31, 2023 totaled $287.3 million (52% of total loans).

Our regulators’ CRE Guidance excludes loans on owner occupied

property from CRE.

Excluding our owner occupied loans, our CRE loans were $220.5 million (40% of total

loans) at year

end 2023.

See “Lending Practices –

CRE.

”

The Bank has loans outstanding to borrowers in all industries within our primary service area.

Any adverse economic or

other conditions affecting these industries would also likely

have an adverse effect on the local workforce, other local

businesses, and individuals in the community that have entered into loans

with the Bank.

For example, the auto

manufacturing business and its suppliers have positively affected

our local economy, but automobile sales

manufacturing is

cyclical and adversely affected by increases in interest rates. Decreases

in automobile sales, including adverse changes due

to interest rate increases, and the remaining economic effects of the

COVID-19 pandemic, including continuing supply

chain disruptions and a tight labor market,

could adversely affect nearby Kia and Hyundai automotive plants

and their

suppliers' local spending and employment, and could adversely affect economic

conditions in the markets we serve.

However, management believes that due to the diversified

mix of industries located within our markets, adverse changes in

one industry may not necessarily affect other area industries

to the same degree or within the same time frame.

The Bank’s

primary service area also is subject to both local and national economic conditions and

fluctuations.

While most loans are

made within our primary service area, some residential mortgage loans are originated

outside the primary service area, and

the Bank from time to time has purchased loan participations from outside its primary service

area.

We also may make

loans to other borrowers outside these areas, especially where we have a relationship

with the borrower, or its business or

owners.

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Human Capital

At December 31, 2023, the Company and its subsidiaries had 149.5 full-time equivalent employees,

including 38 officers.

Our average term of service is approximately 10 years.

We successfully implemented

plans to protect our employees’

health consistent with CDC and State of Alabama guidelines during the COVID-19 pandemic,

while maintaining critical

banking services to our communities.

In addition, we developed our remote and electronic banking services,

and

established remote work access to help employees stay at home where job

duties permitted.

This promoted employee

retention, and these efforts will provide us proven experience and flexibility

to meet other disruptive events and conditions,

and still provide our customers and communities continuity of service.

We experienced

little turnover as a result of the COVID-19 pandemic and made no staff

reductions.

As a result, we

received a federal employee retention tax credit of approximately $1.6

million in 2022.

We have a talented group

of employees,

many of whom,

have a college or associate degree.

We believe the Auburn-

Opelika MSA is a desirable place to live and work with excellent schools and quality of life.

Our MSA was the second

fastest growing MSA in Alabama from 2010 to 2022.

Auburn University is a major employer that attracts talented students

and employee families.

Various

of our

employees have a family member that is employed by or is attending the University.

We had a successful

management transition in 2022 where our CEO became Chairman, and

was succeeded by our CFO,

whose role was then filled by our Chief Accounting Officer.

At the time of transition, our Chairman had served the Bank

his entire 39-year career, our President and CEO had been

with us 16 years and our Chief Accounting Officer had been

with us for 7 years.

Our new President and CFO had careers with major national and regional

accounting firms and focused

on financial services before joining the Bank.

We seek to provide

competitive compensation and benefits.

We provide

employer matches for employee contributions to

our 401(k) retirement plan.

We encourage and

support the growth and development of our employees and, wherever

possible, seek to fill positions by promotion and transfer from within the organization.

Career development is advanced

through ongoing performance and development conversations with employees,

internally developed training programs and

other training and development opportunities.

Our employees are encouraged to be active in our communities as part of our commitment

to these communities and our

employees.

Statistical Information

Certain statistical information is included in responses to Items 6, 7, 7A and 8 of this

Annual Report on Form 10-K.

SUPERVISION AND REGULATION

The Company and the Bank are extensively regulated under federal and state laws applicable

to bank holding companies

and banks.

The supervision, regulation and examination of the Company and the Bank and

their respective subsidiaries by

the bank regulatory agencies are primarily intended to maintain the safety and

soundness of depository institutions and the

federal deposit insurance system, as well as the protection of depositors,

rather than holders of Company capital stock and

other securities.

Any change in applicable law or regulation may have a material effect

on the Company’s business, and

our results of operations and financial condition.

The following discussion is qualified in its entirety by reference to the

particular laws and rules referred to below.

Bank Holding Company Regulation

The Company, as a bank holding company,

is subject to supervision, regulation and examination by the Federal Reserve

under the BHC Act.

Bank holding companies generally are limited to the business of banking,

managing or controlling

banks, and certain related activities.

The Company is required to file periodic reports and other information

with the

Federal Reserve.

The Federal Reserve examines the Company and its subsidiaries.

The State of Alabama currently does

not regulate bank holding companies.

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The BHC Act requires prior Federal Reserve approval for,

among other things, the acquisition by a bank holding company

of direct or indirect ownership or control of more than 5% of the voting shares or substantially

all the assets of any bank, or

for a merger or consolidation of a bank holding company with another

bank holding company.

The BHC Act generally

prohibits a bank holding company from acquiring direct or indirect ownership or

control of voting shares of any company

that is not a bank or bank holding company and from engaging directly or indirectly in any

activity other than banking or

managing or controlling banks or performing services for its authorized subsidiar

ies.

A bank holding company may,

however, engage in or acquire an interest in a company that

engages in activities that the Federal Reserve has determined

by regulation or order to be so closely related to banking or managing or controlling banks

as to be a proper incident

thereto. On January 30, 2020, the Federal Reserve adopted new rules, effective

September 30, 2020 simplifying

determinations of control of banking organizations for BHC Act purposes.

Bank holding companies that are and remain “well-capitalized” and “well-managed,”

as defined in Federal Reserve

Regulation Y,

and whose insured depository institution subsidiaries maintain “satisfactory”

or better ratings under the

Community Reinvestment Act of 1977 (the “CRA”), may elect to become

“financial holding companies.” Financial holding

companies and their subsidiaries are permitted to acquire or engage in activities such as insurance

underwriting, securities

underwriting, travel agency activities, broad insurance agency activities,

merchant banking and other activities that the

Federal Reserve determines to be financial in nature or complementary thereto.

In addition, under the BHC Act’s

merchant

banking authority and Federal Reserve regulations, financial holding companies

are authorized to invest in companies that

engage in activities that are not financial in nature, as long as the financial holding company

makes its investment, subject

to limitations, including a limited investment term, no day-to-day management,

and no cross-marketing with any depositary

institutions controlled by the financial holding company.

The Federal Reserve recommended repeal of the merchant

banking powers in its September 16, 2016 study pursuant to Section 620 of the Dodd-Frank Wall

Street Reform and

Consumer Protection Act of 2010 (the “Dodd-Frank Act”), but has taken no action.

The Company has not elected to

become a financial holding company,

but it may elect to do so in the future.

Financial holding companies continue to be subject to Federal Reserve supervision, regulation

and examination, but the

Gramm-Leach-Bliley Act of 1999 the “GLB Act”) applies the concept of functional

regulation to subsidiary activities.

For

example, insurance activities would be subject to supervision and regulation by state insurance

authorities.

The BHC Act permits acquisitions of banks by bank holding companies, subject

to various restrictions, including that the

acquirer is “well capitalized” and “well managed”.

Bank mergers are also subject to the approval of the resulting bank’s

primary federal regulator pursuant to the Bank Merger Act.

The BHC Act and the Bank Merger Act provide various

generally similar statutory factors.

Under the Alabama Banking Code, with the prior approval of the Alabama

Superintendent, an Alabama bank may acquire and operate one or

more banks in other states pursuant to a transaction in

which the Alabama bank is the surviving bank.

In addition, one or more Alabama banks may enter into a merger

transaction with one or more out-of-state banks, and an out-of-state bank resulting

from such transaction may continue to

operate the acquired branches in Alabama.

The Dodd-Frank Act permits banks, including Alabama banks, to branch

anywhere in the United States.

See “Bank Regulation”.

The Company is a legal entity separate and distinct from the Bank.

Various

legal limitations restrict the Bank from lending

or otherwise supplying funds to the Company.

The Company and the Bank are subject to Sections 23A and 23B of the

Federal Reserve Act and Federal Reserve Regulation W thereunder.

Section 23A defines “covered transactions,” which

include extensions of credit, and limits a bank’s

covered transactions with any affiliate to 10% of such bank’s

capital and

surplus.

All covered and exempt transactions between a bank and its affiliates must be

on terms and conditions consistent

with safe and sound banking practices, and banks and their subsidiaries are prohibited

from purchasing low-quality assets

from the bank’s affiliates.

Finally, Section 23A requires

that all of a bank’s extensions of credit

to its affiliates be

appropriately secured by permissible collateral, generally United States government

or agency securities.

Section 23B of

the Federal Reserve Act generally requires covered and other transactions among affiliates

to be on terms and under

circumstances, including credit standards, that are substantially the same as or at least

as favorable to the bank or its

subsidiary as those prevailing at the time for similar transactions with unaffiliated

companies.

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Federal Reserve policy and the Federal Deposit

Insurance Act, as amended by the Dodd-Frank Act, require a bank holding

company to act as a source of financial and managerial strength to its FDIC-insured

subsidiaries and to take measures to

preserve and protect such bank subsidiaries in situations where additional

investments in a bank subsidiary may not

otherwise be warranted.

In the event an FDIC-insured subsidiary becomes subject to a capital restoration

plan with its

regulators, the parent bank holding company is required to guarantee performance

of such plan up to 5% of the bank’s

assets, and such guarantee is given priority in a bankruptcy of the bank holding

company.

In addition, where a bank

holding company has more than one bank or thrift subsidiary,

each of the bank holding company’s subsidiary

depository

institutions may be responsible for any losses to the FDIC’s

Deposit Insurance Fund (“DIF”), if an affiliated depository

institution fails.

As a result, a bank holding company may be required to loan money to a bank subsidiary in the

form of

subordinate capital notes or other instruments which qualify as capital under bank regulatory rules.

However, any loans

from the holding company to such subsidiary banks likely will be unsecured and subordinated

to such bank’s depositors

and to other creditors of the bank.

See “Capital.”

As a result of legislation in 2014 and 2018, the Federal Reserve has revised its Small Bank

Holding Company Policy

Statement (the “Small BHC Policy”) to expand it to include thrift holding companies and increase

the size of “small” for

qualifying bank and thrift holding companies from $500 million to up to $3

billion of pro forma consolidated assets.

The Federal Reserve confirmed in 2018 that the Company is eligible for treatment as

a small banking holding company

under the Small BHC Policy.

As a result, unless and until the Company fails to qualify under the Small BHC Policy,

the

Company’s capital adequacy

will continue to be evaluated on a bank only basis.

See “Capital.”

Bank Regulation

The Bank is a state bank that is a member of the Federal Reserve.

It is subject to supervision, regulation and examination

by the Federal Reserve and the Alabama Superintendent, which monitor all areas

of the Bank’s operations, including loans,

reserves, mortgages, issuances and redemption of capital securities, payment of dividends,

establishment of branches,

capital adequacy and compliance with laws.

The Bank is a member of the FDIC and, as such, its deposits are insured by

the FDIC to the maximum extent provided by law,

and the Bank is subject to various FDIC regulations applicable to FDIC-

insured banks.

See “FDIC Insurance Assessments.”

Alabama law permits statewide branching by banks.

The powers granted to Alabama-chartered banks by state law include

certain provisions designed to provide such banks competitive equality with national

banks.

The Federal Reserve has adopted the Federal Financial Institutions Examination Council’s

(“FFIEC”) Uniform Financial

Institutions Rating System (“UFIRS”), which assigns each financial institution a confidential

composite “CAMELS” rating

based on an evaluation and rating of six essential components of an institution’s

financial condition and operations:

apital

Adequacy,

sset Quality,

anagement,

arnings,

iquidity and

ensitivity to market risk, as well as the quality of risk

management practices.

For most institutions, the FFIEC has indicated that market risk primarily reflects

exposures to

changes in interest rates.

When regulators evaluate this component, consideration is expected

to be given to management’s

ability to identify, measure,

monitor and control market risk; the institution’s

size; the nature and complexity of its activities

and its risk profile; and the adequacy of its capital and earnings in relation to its level of market risk exposure.

Market risk

is rated based upon, but not limited to, an assessment of the sensitivity of the financial institution’s

earnings or the

economic value of its capital to adverse changes in interest rates, foreign exchange rates,

commodity prices or equity prices;

management’s ability to identify,

measure, monitor and control exposure to market risk; and the nature and

complexity of

interest rate risk exposure arising from non-trading positions. Composite

ratings are based on evaluations of an institution’s

managerial, operational, financial and compliance performance. The

composite CAMELS rating is not an arithmetical

formula or rigid weighting of numerical component ratings. Elements of

subjectivity and examiner judgment, especially as

these relate to qualitative assessments, are important elements in assigning ratings.

The federal bank regulatory agencies

are reviewing the CAMELS rating system and their consistency.

In addition, and separate from the interagency UFIRS, the Federal Reserve assigns a risk

-management rating to all state

member banks. The summary,

or composite, rating, as well as each of the assessment areas, including risk management,

delineated on a numerical scale of 1 to 5, with 1 being the highest or best possible rating. Thus,

a bank with a composite

rating of 1 requires the lowest level of supervisory attention while a 5-rated bank has the

most critically deficient level of

performance and therefore requires the highest degree of supervisory attention.

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Bank mergers, which generally accompany holding company

mergers, are also subject to the approval of the resulting

bank’s primary federal regulator.

On March 19, 2022, the FDIC published a “Request for Information and Comment on

Rules, Regulations, Guidance, and Statements of Policy Regarding Bank Merger

Transactions” (the “FDIC Notice”).

The

FDIC solicited comments from interested parties regarding the application of the laws, practices,

rules, regulations,

guidance, and statements of policy (together, regulatory

framework) that apply to merger transactions involving one

more insured depository institution, including the merger between

an insured depository institution and a noninsured

institution. The FDIC is interested in receiving comments regarding the effectiveness

of the existing framework in meeting

the requirements of the Bank Merger Act.

On January 29, 2024, the Office of the Comptroller of the Currency (“OCC”)

issue a notice of proposed rulemaking to change its standards for reviewing business combination

applications and issue a

policy statement of principles used by the OCC in its merger reviews.

The FDIC Notice described the consolidation of the banking industry,

the increase in the number of large and systemically

important banking organizations and the need to evaluate large

mergers’ financial stability and the resolution of failing

bank risks consistent with the

Dodd-Frank Act changes to the BHC Act and the Bank Merger Act, and the effects

banking mergers on competition.

The FDIC Notice also stated that Executive Order Promoting Competition in the

American Economy (July 9, 2021) (the “Executive Order”), among other things,

“instructs U.S. agencies to consider the

impact that consolidation may have on maintaining a fair,

open, and competitive marketplace, and on the welfare of

workers, farmers, small businesses, startups, and consumers.”

The FDIC requested comments on all aspects of the bank

regulatory framework, including qualitative and quantitative support for such responses.

The other Federal bank regulators

as well as the United States Department of Justice (“DoJ”), are also considering the framework

for mergers involving

banking organizations, including the competitive effects of

such combinations.

The federal bank regulators have not

announced any conclusions, but these reviews could result in changes to the frameworks

used to evaluate banking

combinations which could make such combinations more difficult,

time consuming and expensive.

Federal Reserve

Governor Bowman, in a March 7, 2024 speech, stated that “regulatory reforms in this area

should prioritize speed and

timeliness. Stakeholders who are concerned about current bank M&A procedures

and policies should consider direct

engagement with regulators.”

The GLB Act and related regulations require banks and their affiliated companies

to adopt and disclose privacy policies,

including policies regarding the sharing of personal information with third parties.

The GLB Act also permits bank

subsidiaries to engage in financial activities, which are similar to those permitted

to financial holding companies. In

December 2015, Congress amended the GLB Act as part of the Fixing America’s

Surface Transportation Act. This

amendment provided financial institutions, which meet certain conditions,

an exemption from the requirement to deliver an

annual privacy notice. On August 10, 2018, the federal Consumer Financial

Protection Bureau (“CFPB”) announced that it

had finalized conforming amendments to its implementing regulation, Regulation

A variety of federal and state privacy laws govern the collection, safeguarding, sharing

and use of customer information,

and require that financial institutions have policies regarding information privacy and

security. Some state laws also protect

the privacy of information of state residents and require adequate security of

such data, and certain state laws may,

in some

circumstances, require us to notify affected individuals of security breaches

of computer databases that contain their

personal information. These laws may also require us to notify law enforcement, regulators

or consumer reporting agencies

in the event of a data breach, as well as businesses and governmental agencies that own data.

H.R. 1165, The Data Privacy Act of 2023,

was introduced in Congress on February 24, 2023 by Rep. McHenry,

the

Chairman of the House Financial Services Committee, to which the Bill was referred.

It amends various sections of the

GLB Act and preempts certain state privacy laws.

Its preemption provisions have triggered opposition by the minority in

the House of Representatives.

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Community Reinvestment Act and Consumer Laws

The Bank is subject to the provisions of the CRA and the Federal Reserve’s

CRA regulations.

Under the CRA, all FDIC-

insured institutions have a continuing and affirmative obligation,

consistent with their safe and sound operation, to help

meet the credit needs for their entire communities, including low-

and moderate-income (“LMI”) neighborhoods.

The CRA

requires a depository institution’s primary

federal regulator to periodically assess the institution’s

record of assessing and

meeting the credit needs of the communities served by that institution, including low

and moderate-income neighborhoods.

The bank regulatory agency’s

CRA assessment is publicly available.

Further, consideration of the CRA is required

of any

FDIC-insured institution that has applied to: (i) charter a national bank; (ii) obtain deposit

insurance coverage for a newly-

chartered institution; (iii) establish a new branch office that accepts

deposits; (iv) relocate an office; or (v) merge or

consolidate with, or acquire the assets or assume the liabilities of, an FDIC-insured financial

institution.

A less than

satisfactory CRA rating will slow,

if not preclude, acquisitions, and new branches and other expansion activities and

may

prevent a company from becoming a financial holding company.

The federal CRA regulations require that evidence of

discriminatory, illegal or abusive

lending

practices be considered in the CRA evaluation.

CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s primary

federal

regulator.

Community benefit plans have become common in banking mergers, especially

larger bank combinations.

The

National Community Resolution Coalition reported in February 2023 that it had

executed more than 20 community benefit

plans with banking organizations.

A financial holding company election, and such election and financial holding company

activities are permitted to be continued, only if any affiliated bank has not received

less than a “satisfactory” CRA rating.

The federal CRA regulations require that evidence of discriminatory,

illegal or abusive lending practices be considered in

the CRA evaluation.

The Bank had a “satisfactory” CRA rating in its latest CRA public evaluation dated February 28,

2022, with satisfactory

ratings on both its lending and community development tests.

The federal CRA regulations require that evidence of discriminatory,

illegal or abusive lending practices be considered in

the CRA evaluation.

A financial holding company election, and the continuation of such election and financial

holding company activities are

permitted, if any affiliated bank has not received less than a “satisfactory”

CRA rating.

The Federal Reserve considers the effect of a bank acquisition proposal

on the convenience and needs of the markets served

by the combining organizations.

In the case of bank holding company applications to acquire a bank, the Federal Reserve

will assess and emphasize CRA records of each subsidiary depository institution of the applicant

bank holding company

and the target bank in meeting the needs of their entire communities, including

low-

and moderate-income (“LMI”)

neighborhoods, and such records may be the basis for denying the application.

CRA agreements with private parties must be disclosed and annual

CRA reports must be made to a bank’s primary

federal

regulator.

Community benefit plans have become common in banking mergers, especially

larger bank combinations.

The

National Community Reinvestment Coalition reported in January 2024

that it had executed more than 21 community

benefit plans with banking organizations, with an estimated value of $580

billion to LMI and under-resourced communities.

The Bank is also subject to, among other things, the Equal Credit Opportunity Act (the

“ECOA”) and the Fair Housing Act

and other fair lending laws, which prohibit discrimination based on race or

color, religion, national origin, sex and familial

status in any aspect of a consumer or commercial credit or residential real estate transaction.

The DoJ, and the federal bank

regulatory agencies have issued an Interagency Policy Statement on Discrimination

in Lending to provide guidance to

financial institutions in determining whether discrimination exists, how the

agencies will respond to lending discrimination,

and what steps lenders might take to prevent discriminatory lending practices.

The DOJ has prosecuted what it regards as

violations of the ECOA, the Fair Housing Act, and the fair lending laws, generally.

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New CRA Regulations

The federal banking regulators jointly proposed (the “CRA Proposal”)

revised CRA regulations on June 3, 2022.

Final new

joint CRA regulations were adopted by the Federal Reserve, the OCC and the FDIC on October

24, 2023, and were

finalized and published in the Federal Register on February 1, 2024.

Most of

the new rules’ requirements become effective

January 1, 2026, and other requirements, including required data reporting become effective

January 1, 2027.

The new

CRA regulations confirm that the CRA and fair lending responsibilities and compliance

are mutually reinforcing and that

these regimes recognize the importance of ensuring that the credit markets are inclusive.

The agencies are also retaining

the provision in the CRA regulations that allows downgrading a bank for discriminatory

or other illegal credit practices.

The objectives of the new CRA regulations include:

●

Update CRA regulations to strengthen the achievement of the core purpose of the statute;

●

Adapt to changes in the banking industry,

including the expanded role of mobile and online banking;

●

Provide greater clarity and consistency in the application of the regulations;

●

Tailor performance standards

to account for differences in bank size and business models

and local conditions;

●

Tailor data collection

and reporting requirements and use existing data whenever possible;

●

Promote transparency and public engagement;

●

Confirm that CRA and fair lending responsibilities are mutually reinforcing; and

●

Create a consistent regulatory approach that applies to banks regulated by all three agencies.

The new CRA regulations like the old rules, is based on bank size and business model create

a new framework for

evaluating CRA performance.

Banks are classified as either “small”, “intermediate”, “large”,

or “limited purpose” banks.

The asset size thresholds would be adjusted annually for inflation and have been increased

relative to the bank asset size

thresholds in the old CRA rule.

The Bank is currently an “intermediate small bank,”

but will become an “intermediate

bank” under the new CRA regulations because it has assets of $600 million to $2.0

billion in both of the two prior years.

The new performance evaluation framework establishes two tests for intermediate

banks:

•

the Retail Lending Test; and

•

the Intermediate Bank Community Development Test,

or if elected by the Bank, the Community Development

Financing Test.

Intermediate banks would be evaluated and assigned conclusions of reflecting their

performance under these tests in their

facility based assessment area of “Outstanding”; “High Satisfactory”; “Low Satisfactory”;

“Needs to Improve”; or

“Substantial Noncompliance.”

These conclusions applied to each test would be weighted and combined to form a rating

“Outstanding,” “Satisfactory,”

“Needs to Improve,” or “Substantial Noncompliance.”

A “facility based assessment area” is an area that encompasses or is adjacent

to deposit-taking facilities, including main

offices, branches, and deposit-taking remote service facilities.

Intermediate banks could delineate facility-based areas of

part of a county.

The banking agencies will evaluate retail lending in a bank’s

“outside retail lending area” for large banks,

as well as for intermediate banks, if the majority of their retail lending is outside their

facility-based assessment areas.

A retail lending volume screen would be used to

measure the volume of a bank’s lending relative to its deposit

base in its

facility-based assessment area and would compare that ratio to the aggregate ratio for all reporting

banks with at least one

branch in the same facility-based assessment area.

Second, the agencies would evaluate the geographic distribution and

borrower distribution of a bank’s

major product lines in the bank’s Retail

Lending Test Areas (i.e.,

the bank’s facility-based

assessment areas, and, as applicable, retail lending assessment areas and outside retail

lending area).

using a series of

metrics and benchmarks.

After the agency determines a recommended conclusion for Retail Lending Test

Area, the agency

would consider a list of additional factors that are intended to account for circumstances in

which the retail lending

distribution metrics and benchmarks may not accurately or fully reflect a bank’s

retail lending performance, or in which the

benchmarks may not appropriately represent the credit needs and opportunities in an area.

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Banks will receive consideration for any qualified community development loans,

investments, or services, regardless of

location.

The extent of an agency's consideration of community development loans, community development

investments,

and community development services outside of the bank's facility-based

assessment areas will depend on the adequacy of

the bank's responsiveness to community development needs and opportunities

within the bank's facility-based assessment

areas and applicable performance context information.

The new CRA rules codify agency interpretations under the former

CRA regulations, and provide 11 community development

categories.

The agencies will evaluate the extent to which a

bank’s community development loans,

investments, and services are impactful and responsive in meeting community

development needs.

An intermediate bank's community development test performance is evaluated pursuant

to the

following criteria:

•

the number and dollar amount of community development loans;

•

the number and dollar amount of community development investments;

•

the extent to which the bank provides community development services; and

•

the bank's responsiveness through community development loans, community development

investments, and

community development services to community development needs.

The banking agency's evaluation of the responsiveness of the bank's activities is informed

by information provided by the

bank, and may be informed by the impact and responsiveness review factors described

in the new regulations.

The release proposing these new CRA rules stated that “the agencies believe retail lending

remains a core part of a bank's

affirmative obligation under the CRA to meet the credit needs of their entire

communities. At the same time, the agencies

recognize that, compared to large banks, intermediate banks

might not offer as wide a range of retail products and services,

have a more limited capacity to conduct community development activities, and

may focus on the local communities where

their branches are located.”

The proposal reflected “the agencies’ views that banks of this size should have

meaningful

capacity to conduct community development financing, as they do under

the current approach.

The new rule exempts small and intermediate banks from certain new data requirements

that apply to banks with assets of

at least $2 billion and limits certain new data requirements to large banks

with assets greater than $10 billion.

Overdrafts

The federal bank regulators have updated their guidance several times on overdrafts, including overdrafts

incurred at

automated teller machines and point of sale terminals.

Overdrafts also have been a CFPB concern, and in 2021 began

refocusing on this issue with a view to “insure that banks continue to evolve their

businesses to reduce reliance on overdraft

and not sufficient funds fees.”

Among other things, the federal regulators require banks to monitor accounts and

to limit

the use of overdrafts by customers as a form of short-term, high-cost credit, including,

for example, giving customers who

overdraw their accounts on more than six occasions where a fee is charged in a rolling

12 month period a reasonable

opportunity to choose a less costly alternative and decide whether to continue with fee-based

overdraft coverage.

It also

encourages placing appropriate daily limits on overdraft fees, and asks banks to consider

eliminating overdraft fees for

transactions that overdraw an account by a de minimis amount.

Overdraft policies, processes, fees and disclosures are

frequently the subject of litigation against banks in various jurisdictions. The federal

bank regulators continue to consider

responsible small dollar lending, including overdrafts and related fee issues and issued

principals for offering small-dollar

loans in a responsible manner on May 20, 2020.

CFPB Consumer Financial Protection Circular 2022-06 (Oct. 26, 2022)

concluded that overdraft fee practices must comply

with Regulation Z, Regulation E, and the prohibition against unfair,

deceptive, and abusive acts or practices in Section 1036

of the Consumer Financial Protection Act.

Further,

overdraft fees assessed by financial institutions on transactions that a

consumer would not reasonably anticipate are likely unfair even if these comply

with these other consumer laws and

regulations. The CFPB proposed on February 6, 2019 to rescind its mandatory underwriting

standards for loans covered by

its 2017 Payday, Vehicle

Title and Certain High-Cost Installment Loans rule,

and has separately proposed delaying the

effectiveness of such 2017 rule.

The CFPB has a broad mandate to regulate consumer financial products and services,

whether or not offered by banks or

their affiliates.

The CFPB has the authority to adopt regulations and enforce various laws, including fair

lending laws, the

Truth in Lending Act, the Electronic Funds Transfer

Act, mortgage lending rules, the Truth in Savings Act, the Fair

Credit

Reporting Act and Privacy of Consumer Financial Information rules.

Although the CFPB does not examine or supervise

banks with less than $10 billion in assets, banks of all sizes are affected by the

CFPB’s regulations, and the precedents

set

in CFPB enforcement actions and interpretations.

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Residential Mortgages

CFPB regulations require that lenders determine whether a consumer has the ability to repay

a mortgage loan.

These

regulations establish certain minimum requirements for creditors

when making ability to repay determinations, and provide

certain safe harbors from liability for mortgages that are "qualified mortgages"

and are not “higher-priced.”

Generally,

these CFPB regulations apply to all consumer, closed-end

loans secured by a dwelling including home-purchase loans,

refinancing and home equity loans—whether first or subordinate lien. Qualified

mortgages must generally satisfy detailed

requirements related to product features, underwriting standards,

and requirements where the total points and fees on a

mortgage loan cannot exceed specified amounts or percentages of the total loan amount.

Qualified mortgages must have:

(1) a term not exceeding 30 years; (2) regular periodic payments that do not result in negative

amortization, deferral of

principal repayment, or a balloon payment; (3) and be supported with documentation of the

borrower and its credit. On

December 10, 2020, the CFPB issued final rules related to “qualified mortgage” loans. Lenders

are required under the law

to determine that consumers have the ability to repay mortgage loans before lenders

make those loans. Loans that meet

standards for QM loans are presumed to be loans for which consumers have the ability to

repay.

We focus our residential

mortgage origination on qualified mortgages and those that meet our investors’ requirements,

but

we may make loans that do not meet the safe harbor requirements for “qualified

mortgages.”

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018

(the “2018 Growth Act”) provides that

certain residential mortgages held in portfolio by banks with less than $10 billion in consolidated

assets automatically are

deemed “qualified mortgages.” This relieves smaller institutions from

many of the requirements to satisfy the criteria listed

above for “qualified mortgages.” Mortgages meeting the “qualified

mortgage” safe harbor may not have negative

amortization, must follow prepayment penalty limitations included in the Truth

in Lending Act, and may not have fees

greater than 3% of the total value of the loan.

The Bank generally services the loans it originates, including those it sells.

The CFPB’s mortgage servicing standards

include requirements regarding force-placed insurance, certain notices

prior to rate adjustments on adjustable rate

mortgages, and periodic disclosures to borrowers. Servicers are prohibited

from processing foreclosures when a loan

modification is pending, and must wait until a loan is more than 120 days delinquent

before initiating a foreclosure action.

Servicers must provide borrowers with direct and ongoing access to its personnel,

and provide prompt review of any loss

mitigation application. Servicers must maintain accurate and accessible

mortgage records for the life of a loan and until one

year after the loan is paid off or transferred. These standards increase the cost and compliance

risks of servicing mortgage

loans, and the mandatory delays in foreclosures could result in loss of value on collateral or

the proceeds we may realize

from the sale of foreclosed property.

The Federal Housing Finance Authority (“FHFA”)

updated, effective January 1, 2016, The Federal National Mortgage

Association’s (“Fannie Mae’s”)

and the Federal Home Loan Mortgage Corporation (“Freddie Mac’s”)

(individually and

collectively, “GSE”) repurchase

rules, including the kinds of loan defects that could lead to a repurchase request to, or

alternative remedies with, the mortgage loan originator or seller.

These rules became effective January 1, 2016.

FHFA also

has updated these GSEs’ representations and warranties framework and provided

an independent dispute resolution

(“IDR”) process to allow a neutral third party to resolve demands after the GSEs’ quality

control and appeal processes have

been exhausted.

The Bank is subject to the CFPB’s integrated

disclosure rules under the Truth in Lending Act and the

Real Estate

Settlement Procedures Act, referred to as “TRID”, for credit transactions secured

by real property. Our residential

mortgage

strategy, product offerings,

and profitability may change as these regulations are interpreted and applied

in practice, and

may also change due to any restructuring of Fannie Mae and Freddie Mac

as part of the resolution of their conservatorships.

The 2018 Growth Act reduced the scope of TRID rules by eliminating the wait time for

a mortgage, if an additional creditor

offers a consumer a second offer with a lower annual percentage

rate. Congress encouraged federal regulators to provide

better guidance on TRID in an effort to provide a clearer understanding

for consumers and bankers alike. The law also

provides partial exemptions from the collection, recording and reporting requirements

under Sections 304(b)(5) and (6) of

the Home Mortgage Disclosure Act (“HMDA”), for those banks with fewer than 500

closed-end mortgages or less than

500 open-end lines of credit in both of the preceding two years, provided

the bank’s rating under the CRA for the previous

two years has been at least “satisfactory.”

On August 31, 2018, the CFPB issued an interpretive and procedural rule to

implement and clarify these requirements under the 2018 Growth Act.

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The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

was enacted on March 27, 2020. Section 4013 of

the CARES Act, “Temporary

Relief From Troubled Debt Restructurings,” provides banks

the option to temporarily

suspend certain requirements under ASC 340-10 TDR classifications

for a limited period of time to account for the effects

of COVID-19. On April 7, 2020, the Federal Reserve and the other banking agencies and

regulators issued a statement,

“Interagency Statement on Loan Modifications and Reporting for Financial Institutions

Working With

Customers Affected

by the Coronavirus (Revised)” (the “Interagency Statement on COVID-19

Loan Modifications”), to encourage banks to

work prudently with borrowers and to describe the agencies’ interpretation of

how accounting rules under ASC 310-40,

“Troubled Debt Restructurings by Creditors,” apply to covered

modifications. The Interagency Statement on COVID-19

Loan Modifications was supplemented on June 23, 2020 by the Interagency

Examiner Guidance for Assessing Safety and

Soundness Considering the Effect of the COVID-19 Pandemic on Institutions.

If a loan modification is eligible, a bank may

elect to account for the loan under section 4013 of the CARES Act. If a loan modification

is not eligible under section

4013, or if the bank elects not to account for the loan modification under section 4013,

the Revised Statement includes

criteria when a bank may presume a loan modification is not a TDR in accordance

with ASC 310-40.

Section 4021 of the CARES Act allows borrowers under 1-to-4 family residential

mortgage loans sold to Fannie Mae to

request forbearance to the servicer after affirming that such borrower

is experiencing financial hardships during the

COVID-19 emergency.

Such forbearance will be up to 180 days, subject to up to a 180-day extension. During

forbearance,

no fees, penalties or interest shall be charged beyond those applicable

if all contractual payments were fully and timely

paid. Except for vacant or abandoned properties, Fannie Mae servicers may

not initiate foreclosures on similar procedures

or related evictions or sales until December 31, 2020. The forbearance period

was extended to February 28, 2021 and then

again to March 31, 2021 after being extended earlier to February 28, 2021. Borrowers

who are on a COVID-19 forbearance

plan as of February 28, 2021 may apply for an additional forbearance extension of up to

three additional months. The Bank

sells mortgage loans to Fannie Mae and services these on an actual/actual basis. As a result,

the Bank is not obligated to

make any advances to Fannie Mae on principal and interest on such mortgage loans where

the borrower is entitled to

forbearance.

Anti-Money Laundering and Sanctions

The International Money Laundering Abatement and Anti-Terrorism

Funding Act of 2001 specifies “know your customer”

requirements that obligate financial institutions to take actions to verify the identity of the

account holders in connection

with opening an account at any U.S. financial institution.

Bank regulators are required to consider compliance with anti-

money laundering laws in acting upon merger and acquisition and other

expansion proposals under the BHC Act and the

Bank Merger Act, and sanctions for violations of this Act can be imposed

in an amount equal to twice the sum involved in

the violating transaction, up to $1 million.

Under the Uniting and Strengthening America by Providing Appropriate Tools

Required to Intercept and Obstruct

Terrorism Act of 2001

(the “USA PATRIOT

Act”), financial institutions are subject to prohibitions against specified

financial transactions and account relationships as well as to enhanced due diligence

and “know your customer” standards

in their dealings with foreign financial institutions and foreign customers.

The USA PATRIOT

Act requires financial institutions to establish anti-money laundering

programs, and sets forth

minimum standards, or “pillars” for these programs, including:

●

the development of internal policies, procedures, and controls;

●

the designation of a compliance officer;

●

an ongoing employee training program;

●

an independent audit function to test the programs; and

●

ongoing customer due diligence and monitoring.

Federal Financial Crimes Enforcement Network (“FinCEN”) rules effective

May 2018 require banks to know the beneficial

owners of customers that are not natural persons, update customer information in order

to develop a customer risk profile,

and generally monitor such matters.

On August 13, 2020, the federal bank regulators issued a joint statement clarifying that isolated

or technical violations or

deficiencies are generally not considered the kinds of problems that would

result in an enforcement action. The statement

addresses how the agencies evaluate violations of individual pillars of the Bank Secrecy

Act and anti-money laundering

(“AML/BSA”) compliance program. It describes how the agencies incorporate

the customer due diligence regulations and

recordkeeping requirements issued by the U.S. Department of the Treasury

(“Treasury”) as part of the internal controls

pillar of a financial institution's AML/BSA compliance program.

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On September 16, 2020, FinCEN issued an advanced notice of proposed

rulemaking seeking public comment on a wide

range of potential regulatory amendments under the Bank Secrecy Act. The proposal

seeks comments on incorporating an

“effective and reasonably designed” AML/BSA program component

to empower financial institutions to allocate resources

more effectively.

This component also would seek to implement a common understanding

between supervisory agencies

and financial institutions regarding the necessary AML/BSA program elements, and

would seek to impose minimal

additional obligations on AML programs that already comply under the existing supervisory

framework.

On October 23, 2020, FinCEN and the Federal Reserve invited comment on a proposed

rule that would amend the

recordkeeping and travel rules under the Bank Secrecy Act, which would lower the applicable

threshold from $3,000 to

$250 for international transactions and apply these rules to transactions using convertible

virtual currencies and digital

assets with legal tender status.

On January 1, 2021, Congress enacted the Anti-Money Laundering

Act of 2020 and the Corporate Transparency Act

(collectively, the “AML

Act”), to strengthen anti-money laundering and countering terrorism

financing programs. Among

other things, the AML Act:

●

specifies uniform disclosure of beneficial ownership information for all U.S. and

foreign entities conducting

business in the U.S.;

●

increases potential fines and penalties for BSA violations and improves whistleblower

incentives;

●

codifies the risk-based approach to AML compliance;

●

modernizes AML systems;

●

expands the duties and powers FinCEN; and

●

emphasizes coordination and information-sharing among financial institutions, U.S.

financial regulators and

foreign financial regulators.

The Corporate Transparency Act (the”CTA”)

was adopted as Title LXIV of the William

M. (Mac) Thornberry National

Defense Authorization Act for Fiscal Year

2021.

FinCEN adopted a final regulation as 31 C.F.R.

101.380 on September

30, 2022 to implement the CTA.

This became effective on January 1, 2024.

These regulations require entities to report

information about their beneficial owners and the individuals who created the entity (together,

“beneficial ownership

information” or “BOI”).

FinCEN explained that the proposed rule would help protect the U.S. financial system from illicit

use by making it more difficult for bad actors to conceal their financial activities

through entities with opaque ownership

structures.

FinCEN also explained that the proposed reporting obligations would provide

essential information to law

enforcement and others to help prevent corrupt actors, terrorists, and proliferators from hiding

money or other property in

the United States.”

The new rules expand financial institutions’ obligations under the Customer

Due Diligence Rule

(“CDD Rule”) to collect information and verify the beneficial ownership of legal entities.

Although the Company and the

Bank are exempt from the CTA’s

requirements to report their respective beneficial owners, the new laws are likely to

increase the Bank’s anti-money laundering

diligence activities and costs.

FinCEN published a request for information and comment on December 15, 2021

seeking ways to streamline, modernize

the United States AML and countering the financing of terrorists.

The United States has imposed various sanctions upon various foreign countries,

such as China, Iran, North Korea, Russia

and Venezuela,

and their certain government officials and persons.

Banks are required to comply with these sanctions,

which require additional customer screening and transaction monitoring.

Russia’s February 2022 invasion

of Ukraine has generated a significant number of new sanctions on Russia, Russian

persons and suppliers of military or dual-purpose products to Russia,

The Federal bank regulators have issued alerts that

Russia and others may step up cyber-attacks and data

intrusions following the invasion.

FinCen has issued four alerts on

potential Russian illicit financial activity since February 2022.

On January 25, 2023 FinCEN issued an alert to financial

institutions on potential investments in the U.S. commercial real estate sector by sanctioned

Russian elites, oligarchs, their

family members, and the entities through which they act. The alert listed potential

red flags and typologies involving

attempted sanctions evasion in the commercial real estate sector,

and reminds financial institutions of their Bank Secrecy

Act (BSA) reporting obligations.

H.R. 1164, the OFAC

Outreach and Engagement Capabilities and Enhancement

Act, was introduced in Congress on

February 24, 2023.

It would set up a review of and improve OFAC

outreach and communications to assist financial

institutions to better understand and comply with OFAC

sanctions.

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Other Laws and Regulations

The Company is also required to comply with various corporate governance and financial

reporting requirements under the

Sarbanes-Oxley Act of 2002, as well as related rules and regulations adopted

by the SEC, the Public Company Accounting

Oversight Board and Nasdaq. In particular, the Company

is required to report annually on internal controls as part of its

annual report pursuant to Section 404 of the Sarbanes-Oxley Act.

The Company has evaluated its controls, including compliance

with the SEC and FDIC rules on internal controls, and

expects to continue to spend significant amounts of time and money on compliance

with these rules. If the Company fails to

comply with these internal control rules in the future, it may materially adversely

affect its reputation, its ability to obtain

the necessary certifications to its financial statements, its relations with its regulators

and other financial institutions with

which it deals, and its ability to access the capital markets and offer and sell Company

securities on terms and conditions

acceptable to the Company. The Company’s

assessment of its financial reporting controls as of December 31, 2022 are

included in this report with no material weaknesses reported.

Bank Dividends

The Company is a legal entity separate and distinct from the Bank.

Federal Reserve Regulation Q limits “distributions,”

including discretionary bonus payments from eligible retained income” by state

member banks, such as the Bank, unless its

capital conservation buffer of common equity Tier

1 capital (“CET1”) exceeds 2.5%. “Distributions” include dividends

declared or paid on common stock, discretionary bonuses and stock repurchases,

redemptions or repurchases of Tier 2

capital instruments (unless replaced by a capital instrument in the same quarter).

“Eligible retained income” for the Bank

and other Federal Reserve regulated institutions is the greater of:

●

net income for the four preceding calendar quarters, net of any distributions and associated

tax effects not already

reflected in net income; or

●

the average net income over the preceding four quarters.

The Company’s primary source

of cash is dividends from the Bank.

The Bank’s Call Report are used for

its calculation of

“eligible retained income.”

The Bank’s capital conservation buffer

exceeded 2.5% at December 31, 2023.

As of December 31, 2023, the Bank is “well capitalized” under the regulatory framework

for prompt corrective action. To

be categorized as “well capitalized,” the Bank must maintain minimum common equity Tier

1, total risk-based, Tier

1 risk-

based, and Tier 1 leverage ratios as set forth in the following

table. Management has not received any notification from the

Bank's regulators that changes the Bank’s regulatory

capital status.

Prior regulatory approval also is required by statute if the total of all dividends declared by

a state member bank (such as

the Bank) in any calendar year will exceed the sum of such bank’s

net profits for the year and its retained net profits for the

preceding two calendar years, less any required transfers to surplus.

During 2023, the Bank paid total cash dividends of

approximately $3.8 million to the Company.

At December 31, 2023, the Bank had net profits for the year and its retained

net profits for the preceding two calendar years, less any required transfers to surplus, of

$8.2 million.

In addition, the Company and the Bank are subject to various general regulatory policies

and requirements relating to the

payment of dividends, including requirements to maintain capital above regulatory

minimums. The appropriate federal and

state regulatory authorities are authorized to determine when the payment of dividends

would be an unsafe or unsound

practice, and may prohibit such dividends. The Federal Reserve has indicated that paying dividends

that deplete a state

member bank’s capital base to an inadequate

level would be an unsafe and unsound banking practice. The

Federal Reserve

has indicated that depository institutions and their holding companies should generally pay

dividends only out of current

year’s operating earnings.

See “Regulatory Capital Changes” and Note 16 to the Company’s

consolidated financial

statements.

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Federal Reserve Supervisory Letter SR-09-4 (February 24, 2009),

as revised December 21, 2015, applies to dividend

payments, stock redemptions and stock repurchases.

Prior consultation with the Federal Reserve supervisory staff is

required before:

●

redemptions or repurchases of capital instruments when the bank

holding company is experiencing financial

weakness; and

●

redemptions and purchases of common or perpetual preferred stock which

would reduce such Tier 1 capital at end

of the period compared to the beginning of the period.

Bank holding company directors must consider different factors to

ensure that its dividend level is prudent relative to

maintaining a strong financial position, and is not based on overly optimistic earnings

scenarios, such as potential events

that could affect its ability to pay,

while still maintaining a strong financial position. As a general matter,

the Federal

Reserve has indicated that the board of directors of a bank holding company should

consult with the Federal Reserve and

eliminate, defer or significantly reduce the bank holding company’s

dividends if:

●

its net income available to shareholders for the past four quarters, net of dividends previously

paid during that

period, is not sufficient to fully fund the dividends;

●

its prospective rate of earnings retention is not consistent with its capital needs and overall

current and prospective

financial condition; or

●

It will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy

ratios.

Capital

The Federal Reserve has risk-based capital guidelines for bank holding companies and

state member banks, respectively.

These guidelines required, beginning December 31, 2019, a minimum ratio of capital

to risk-weighted assets (including

certain off-balance sheet activities, such as standby letters of credit)

and capital conservation buffer, totaling 10.5%.

Tier 1

capital includes common equity and related retained earnings and a limited amount

of qualifying preferred stock, less

goodwill and certain core deposit intangibles.

Voting

common equity must be the predominant form of capital.

Tier 2

capital consists of non–qualifying preferred stock, qualifying subordinated,

perpetual, and/or mandatory convertible debt,

term subordinated debt and intermediate term preferred stock, up to 45% of pretax unrealized

holding gains on available for

sale equity securities with readily determinable market values that are prudently

valued, and a limited amount of general

loan loss allowance. Tier 1 and Tier

2 capital equals total capital.

In addition, the Federal Reserve has established minimum leverage ratio guidelines

for bank holding companies not subject

to the Small BHC Policy, and

state member banks, which provide for a minimum leverage ratio of Tier

1 capital to adjusted

average quarterly assets (“leverage ratio”) equal to 4%.

However, bank regulators expect banks and bank holding

companies to operate with a higher leverage ratio.

The guidelines also provide that institutions experiencing internal

growth or making acquisitions will be expected to maintain strong capital positions substantially

above the minimum

supervisory levels without significant reliance on intangible assets.

Higher capital may be required in individual cases and

depending upon a bank holding company’s

risk profile.

All bank holding companies and banks are expected to hold capital

commensurate

with the level and nature of their risks including the volume and severity of their problem loans.

Lastly, the Federal Reserve’s

guidelines indicate that the Federal Reserve will continue to consider

a “tangible Tier 1

leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or

new activities.

The level of Tier 1

capital to risk-adjusted assets is becoming more widely used by the bank regulators to

measure capital adequacy. The

Federal Reserve has not advised the Company or the Bank of any specific minimum leverage

ratio or tangible Tier 1

leverage ratio applicable to them. Under Federal Reserve policies, bank holding companies

are generally expected to

operate with capital positions well above the minimum ratios. The Federal

Reserve believes the risk-based ratios do not

fully take into account the quality of capital and interest rate, liquidity,

market and operational risks. Accordingly,

supervisory assessments of capital adequacy may differ significantly

from conclusions based solely on the level of an

organization’s risk-based

capital ratio.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among

other things, requires the federal

banking agencies to take “prompt corrective action” regarding depository institutions that

do not meet minimum capital

requirements.

FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,”

“undercapitalized,”

“significantly undercapitalized” and “critically undercapitalized.”

A depository institution’s capital tier will depend upon

how its capital levels compare to various relevant capital measures and certain other

factors, as established by regulation.

See

“Prompt Corrective Action Rules.”

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Basel III Capital Rules

The Federal Reserve and the other bank regulators adopted in June 2013 final capital rules

for bank holding companies and

banks implementing the Basel Committee on Banking Supervision’s

“Basel III: A Global Regulatory Framework for more

Resilient Banks and Banking Systems.”

These U.S. capital rules are called the “Basel III Capital Rules,” and generally

were fully phased-in on January 1, 2019.

These are included in Federal Reserve Regulation Q.

The Basel III Capital Rules limit Tier 1 capital to

common stock and noncumulative perpetual preferred stock, as well as

certain qualifying trust preferred securities and cumulative perpetual preferred

stock issued before May 19, 2010, each of

which were grandfathered in Tier 1 capital for bank holding

companies with less than $15 billion in assets.

The Company

had no qualifying trust preferred securities or cumulative preferred stock outstanding at December

31, 2021 or 2022.

The

Basel III Capital Rules also introduced a new capital measure, “Common Equity Tier

I Capital” or “CET1.”

CET1 includes

common stock and related surplus, retained earnings,

and subject to certain adjustments, minority common equity interests

in subsidiaries.

CET1 is reduced by deductions for:

●

Goodwill and other intangibles, other than mortgage servicing assets (“MSRs”),

which are treated separately, net

of associated deferred tax liabilities (“DTLs”);

●

Deferred tax assets (“DTAs”)

arising from operating losses and tax credit carryforwards net of allowances and

DTLs;

●

Gains on sale from any securitization exposure; and

●

Defined benefit pension fund net assets (i.e., excess plan assets), net of associated DTLs.

The Company made a one-time election in 2015 and, as a result, the Company’s

CET1 is not adjusted for certain

accumulated other comprehensive income (“AOCI”).

Additional “threshold deductions” of the following that are individually greater

than 10% of CET1 or collectively greater

than 15% of CET1 (after the above deductions are also made):

●

MSAs, net of associated DTLs;

●

DTAs arising from temporary

differences that could not be realized through net operating loss carrybacks,

net of

any valuation allowances and DTLs; and

●

Significant common stock investments in unconsolidated financial institutions,

net of associated DTLs.

Noncumulative perpetual preferred stock and Tier

1 minority interest not included in CET1, subject to limits, will qualify as

additional Tier I capital.

All other qualifying preferred stock, subordinated debt and qualifying minority interests

will be

included in Tier 2 capital.

Regulatory Capital Changes

Simplification

The federal bank regulators issued final rules on July 22, 2019 simplifying their capital rules.

The last of these changes

become effective on April 1, 2020.

The principal changes for standardized approaches institutions, such the

Company and

the Bank are:

●

Deductions from capital for certain items, such as temporary difference

DTAs, MSAs and investments

unconsolidated subsidiaries were decreased to those amounts that individually exceed

25% of CET1;

●

Institutions can elect to deduct investments in unconsolidated subsidiaries or subject

them to capital requirements;

and

●

Minority interests would be includable up to 10% of (i) CET1 capital, (ii) Tier

1 capital and (iii) total capital.

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HVCRE

In December 2019, the federal banking regulators published a final rule, effective

April 1, 2020, to implement the “high

volatility commercial real estate,” or “HVCRE” changes in Section 214 of the 2018

Growth Act.

Any HVCRE exposure

excludes loans made before January 1, 2015.

The rules define HVCRE loans as loans secured by land or improved real

property that:

●

primarily finance or refinance the acquisition, development, or construction of real property;

●

the purpose of such loans must be to acquire, develop, or improve such real property into

income producing

property; and

●

the repayment of the loan must depend on the future income or sales proceeds from, or refinancing

of, such real

property.

Various

exclusions from HVCRE are specified.

The full value of any borrower contributed land (net of any liens on the

land securing HVCRE exposure) count toward the 15% capital contribution to

the appraised as completed value, which is

one of the criteria for exemption form the heightened risk weight.

Banking institutions and their holding companies are

required to assign 150% risk weight to HVCRE loans.

Capital Conservation Buffer

In addition to the minimum risk-based capital requirements, a “capital conservation

buffer” of CET1 capital of at least

2.5%, is required.

The capital conservation buffer will be calculated as the

lowest

of:

●

the banking organization’s

CET1 capital ratio minus 4.5%;

●

the banking organization’s

tier 1 risk-based capital ratio minus 6.0%; and

●

the banking organization’s

total risk-based capital ratio minus 8.0%.

Full compliance with the capital conservation buffer

was required beginning January 1, 2019.

Thereafter, permissible

dividends, stock repurchases and discretionary bonuses will be limited to the following

percentages based on the capital

conservation buffer as calculated above, subject to any further

regulatory limitations, including those based on risk

assessments and enforcement actions:

Capital Conservation

Buffer %

Buffer % Limit

More than 2.50%

None

> 1.875% - 2.50%

60.0%

> 1.250% - 1.875%

40.0%

> 0.625% - 1.250%

20.0%

≤ 0.625

- 0 -

On March 20, 2020, the Federal Reserve and the other federal banking regulators adopted

an interim final rule that

amended the capital conservation buffer in light of the disruptive effects

of the COVID-19 pandemic.

This clarifying rule

revises the definition of “eligible retained income” for purposes of the maximum payout

ratio to allow banking

organizations to more freely use their capital buffers to promote

lending and other financial intermediation activities, by

making the limitations on capital distributions more gradual. The

eligible retained income, as used in the Federal Reserve’s

Regulation Q capital rule, as corrected on January 13, 2021, is the greater of (i) net income

for the four preceding quarters,

net of distributions and associated tax effects not reflected in net income;

and (ii) the average of all net income over the

preceding four quarters.

Banking organizations were encouraged to

make prudent capital distribution decisions.

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Basel III Capital

The various capital elements and total capital under the Basel III Capital Rules, as fully phased

in on January 1, 2019 are:

Fully Phased In

January 1, 2019

Minimum CET1

4.50%

CET1 Conservation Buffer

2.50%

Total CET1

7.0%

Deductions from CET1

100%

Minimum Tier 1 Capital

6.0%

Minimum Tier 1 Capital

plus

conservation buffer

8.5%

Minimum Total Capital

8.0%

Minimum Total Capital

plus

conservation buffer

10.5%

Changes in Risk-Weightings

The Basel III Capital Rules significantly change the risk weightings used to determine risk

weighted capital adequacy.

Among various other changes, the Basel III Capital Rules apply a 250% risk-weighting

to MSRs, DTAs that

cannot be

realized through net operating loss carrybacks and significant (greater than 10%) investments

in other financial institutions.

A 150% risk-weighted category applies to “high volatility commercial real estate loans,”

or “HVCRE,” which are credit

facilities for the acquisition, construction or development of real property,

excluding one-to-four family residential

properties or commercial real estate projects where: (i) the loan-to-value ratio is

not in excess of interagency real estate

lending standards; and (ii) the borrower has contributed capital equal to not less than 15%

of the real estate’s “as

completed” value before the loan was made.

The Basel III Capital Rules also changed some of the risk weightings used to determine risk

-weighted capital adequacy.

Among other things, the Basel III Capital Rules:

●

Assigned a 250% risk weight to MSRs;

●

Assigned up to a 1,250% risk weight to structured securities, including private label

mortgage securities, trust

preferred CDOs and asset backed securities;

●

Retained existing risk weights for residential mortgages, but assign a 100%

risk weight to most commercial real

estate loans and a 150% risk-weight for HVCRE;

●

Assigned a 150% risk weight to past due exposures (other than sovereign exposures

and residential mortgages);

●

Assigned a 250% risk weight to DTAs,

to the extent not deducted from capital (subject to certain maximums);

●

Retained the existing 100% risk weight for corporate and retail loans; and

●

Increased the risk weight for exposures to qualifying securities firms from 20% to 100%.

In December 2019 the federal bank regulators revised their definition of HVCRE and related

capital requirements

consistent with Section 214 of the 2018 Growth Act.

The Financial Accounting Standards Board’s

(“FASB”) Accounting

Standards Update (“ASU”) No. 2016-13 “Financial

Instruments – Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments” on June 16, 2016,

which

changed the loss model to take into account current expected credit losses (“CECL”)

in place of the incurred loss method.

The Federal Reserve and the other federal banking agencies adopted rules effective

on April 1, 2019 that allows banking

organizations to phase in the regulatory capital effect of a reduction

in retained earnings upon adoption of CECL over a

three-year period.

On May 8, 2020, the agencies issued a statement describing the measurement of expected credit

losses

using the CECL methodology,

and updated concepts and practices in existing supervisory guidance that remain

applicable.

CECL became effective for the Company beginning January 1,

2023.

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Federal Reserve Capital Review

The Federal Reserve’s Vice

Chair for Supervision has indicated he is considering a holistic review of regulatory capital

requirements, which are expected to focus on banking organizations larger

than the Company.

Prompt Corrective Action Rules

All of the federal bank regulatory agencies’ regulations establish risk-adjusted

measures and relevant capital levels that

implement the “prompt corrective action” standards.

The relevant capital measures are the total risk-based capital ratio,

Tier 1 risk-based capital ratio, Common equity tier

1 capital ratio, as well as the leverage capital ratio.

Under the

regulations, a state member bank will be:

●

well capitalized if it has a total risk-based capital ratio of 10% or greater,

a Tier 1 risk-based capital ratio of 8% or

greater, a Common equity tier 1 capital ratio

of 6.5% or greater, a leverage capital ratio of 5% or greater

and is not

subject to any written agreement, order,

capital directive or prompt corrective action directive by a federal bank

regulatory agency to maintain a specific capital level for any capital

measure;

●

“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater,

a Tier 1 risk-based capital ratio

of 6.0% or greater, a Common Equity Tier

1 capital ratio of 4.5% or greater, and generally has a leverage

capital

ratio of 4.0% or greater;

●

“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier

1 risk-based capital ratio of less

than 6.0%, a Common Equity Tier 1 capital

ratio of less than 4.5% or generally has a leverage capital ratio of less

than 4.0%;

●

“significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier

1 risk-based

capital ratio of less than 6.0%, a Common Equity Tier 1

capital ratio of less than 3%, or a leverage capital ratio of

less than 3.0%; or

●

“critically undercapitalized” if its tangible equity is equal to or less than 2.0% to total assets.

The federal bank regulatory agencies have authority to require additional capital

where they determine it is necessary,

including where a bank is unsafe or unsound condition or where the bank is determined

to have less than a satisfactory

rating on any of its CAMELS ratings. The regulators have confirmed that higher capital levels

may be required in light of

market conditions and risk.

Depository institutions that are “adequately capitalized” for bank regulatory purposes

must receive a waiver from the FDIC

prior to accepting or renewing brokered deposits, and cannot pay interest rates or brokered

deposits that exceeds market

rates by more than 75 basis points.

Banks that are less than “adequately capitalized” cannot accept

or renew brokered

deposits.

FDICIA generally prohibits a depository institution from making any capital distribution,

including paying

dividends or any management fee to its holding company,

if the depository institution thereafter would be

“undercapitalized”.

Institutions that are “undercapitalized” are subject to growth limitations and are required

to submit a

capital restoration plan for approval.

A depository institution’s parent holding company

must guarantee that the institution will comply with such capital

restoration plan.

The aggregate liability of the parent holding company is limited to the lesser

of 5% of the depository

institution’s total assets at the time it became

undercapitalized and the amount necessary to bring the institution into

compliance with applicable capital standards.

If a depository institution fails to submit an acceptable plan, it is treated

as if

it is “significantly undercapitalized”.

If the controlling holding company fails to fulfill its obligations under FDICIA and

files (or has filed against it) a petition under the federal Bankruptcy Code, the claim against

the holding company’s capital

restoration obligation would be entitled to a priority in such bankruptcy proceeding over

third-party creditors of the bank

holding company.

Significantly undercapitalized depository institutions may be subject

to a number of requirements and restrictions,

including orders to sell sufficient voting stock to become “adequately capitalized”,

requirements to reduce total assets, and

cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the

appointment of a receiver or conservator.

Because the Company and the Bank exceed applicable capital requirements,

Company and Bank management do not believe that the prompt corrective action provisions

of FDICIA have had or are

expected to have any material effect on the Company and the Bank or

their respective operations.

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Community Bank Leverage Ratio Framework

Section 201 of the 2018 Growth Act provides that banks and bank holding companies

with consolidated assets of less than

$10 billion that meet a “community bank leverage ratio,” established by the federal bank

regulators as part of the

community bank leverage ratio framework (“CBLR”).

The federal banking agencies have the discretion to determine that

an institution does not qualify for such treatment due to its risk profile. An institution’s

risk profile may be assessed by

its off-balance sheet exposure, trading of assets and liabilities, notional derivatives’

exposure, and other methods.

The CBLR framework which became effective January 1,

2020, allows qualifying CBOs to adopt a simple leverage ratio to

measure capital adequacy.

The CBLR may be elected by depository institutions and their holding companies

and is

intended to reduce regulatory burdens for qualifying community banking organizations

that do not use advanced

approaches capital measures, and otherwise qualify.

Eligible institutions

must have:

●

less than $10 billion of assets;

●

a leverage ratio greater than 9%;

●

off-balance sheet exposures of 25% or less of total consolidated

assets; and

●

trading assets plus trading liabilities of less than 5% of total consolidated assets.

The CBLR leverage ratio is Tier 1 capital divided

by average total consolidated asset for the latest quarter, taking into

account the capital simplification discussed above and the CECL related capital transitions.

A CBLR banking organization with a ratio above the requirement

will not be subject to other capital and leverage

requirements.

If elected by a banking organization, The CBLR leverage ratio

will be the sole capital measure, and electing

institutions will not have to calculate or use any other capital measure for regulatory purposes.

The Company has not

adopted the CBLR, although it believes it is eligible to elect to use the CBLR framework.

Management believes that

current risk-based capital measures are useful and reflect the risks of the Company’s

earning assets in a manner most

comparable to other banking organizations and which may be useful to investors.

It may consider the CBLR in the future.

FDICIA

FDICIA directs that each federal bank regulatory agency prescribe standards for depository

institutions and depository

institution holding companies relating to internal controls, information systems,

internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth composition, a

maximum ratio of classified assets to capital,

minimum earnings sufficient to absorb losses, a minimum ratio

of market value to book value for publicly traded shares,

safety and soundness, and such other standards as the federal bank regulatory agencies deem

appropriate.

Enforcement Policies and Actions

The Federal Reserve and the Alabama Superintendent examine and regulate our compliance

with laws and regulations,

including the CFPB’s regulations.

The CFPB issues regulations, interpretations and enforcement actions

under the laws

applicable to consumer financial products and services.

Violations of laws and regulations,

including those administered by

the CFPB, or other unsafe and unsound practices, may result in the Federal Reserve and the

Alabama Superintendent

imposing fines, penalties and/or restitution, cease and desist orders,

or taking other formal or informal enforcement actions.

Under certain circumstances, these agencies may enforce these remedies directly against

officers, directors, employees and

others participating in the affairs of a bank or bank holding company,

in the form of fines, penalties, or the recovery,

claw-back, of compensation.

Fiscal and Monetary Policies

Banking is a business that depends on interest rate differentials.

In general, the difference between the interest paid by a

bank on its deposits and its other borrowings, and the interest received by a bank on its loans and

securities holdings,

constitutes the major portion of a bank’s earnings.

Thus, the earnings and growth of the Company and the Bank, as well as

the values of, and earnings on, its assets and the costs of its deposits and other liabilities are

subject to the influence of

economic conditions generally,

both domestic and foreign, and also to the monetary and fiscal policies of the United States

and its agencies, particularly the Federal Reserve.

The Federal Reserve regulates the supply of money through various

means, including open market dealings in United States government securities, the setting

of discount rate at which banks

may borrow from the Federal Reserve, and the reserve requirements on deposits.

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The Federal Reserve has been paying interest on depository institutions’ required and excess

reserve balances since October

2008.

The payment of interest on excess reserve balances was expected to give the Federal

Reserve greater scope to use its

lending programs to address conditions in credit markets while also

maintaining the federal funds rate close to the target

rate established by the Federal Open Market Committee.

The Federal Reserve has indicated that it may use this authority to

implement a mandatory policy to reduce excess liquidity,

in the event of inflation or the threat of inflation.

In April 2010, the Federal Reserve Board amended Regulation D (Reserve Requirements

of Depository Institutions)

authorizing the Reserve Banks to offer term deposits to certain institutions.

Term deposits,

which are deposits with

specified maturity dates, will be offered through a Term

Deposit Facility.

Term deposits will be

one of several tools that

the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate

to begin moving to a less

accommodative stance of monetary policy.

In 2011, the Federal Reserve repealed its historical Regulation

Q to permit banks to pay interest on demand deposits.

In light of disruptions in economic conditions caused by the outbreak of COVID-19 and the

stress in U.S. financial markets,

the Federal Reserve, Congress and the Department of the Treasury took

a host of fiscal and monetary measures to minimize

the economic effect of COVID-19. On March 3, 2020,

the Federal Reserve reduced the Federal Funds rate target by 50

basis points to 1.00-1.25%. The Federal Reserve further reduced the Federal Funds Rate target

by an additional 100 basis

points to 0-0.25% on March 16, 2020. The Federal Reserve established various liquidity

facilities pursuant to section 13(3)

of the Federal Reserve Act to help stabilize the financial system and purchased large

amounts of government and

mortgaged backed securities.

The CARES Act provided a $2 trillion stimulus package and various measures to

provide relief from the COVID-19

pandemic, including:

●

The Paycheck Protection Program (“PPP”), which expands eligibility for special new SBA

guaranteed loans,

forgivable loans and other relief to small businesses affected

by COVID-19.

●

A new $500 billion federal stimulus program for air carriers and other companies in severely

distressed sectors of

the American economy. The lending

programs impose stock buyback, dividend, executive compensation, and

other restrictions on direct loan recipients.

●

Optional temporary suspension of certain requirements under ASC 340-10 TDR

classifications for a limited period

of time to account for the effects of COVID-19.

●

The creation of rapid tax rebates and expansion of unemployment benefits to

provide relief to individuals.

●

Substantial federal spending and significant changes for health care companies,

providers, and patients.

●

Over $525 billion of PPP loans were made in 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits,

and Venues

Act (the “Economic Aid

Act”) was signed into law. The

Economic Aid Act provided a second $900 billion stimulus package,

including $325 billion

in additional PPP loans, changed the eligibility rules to focus more on smaller business, further

enhances other Small

Business Association programs.

During 2021 and at the beginning of 2022, the Federal Reserve described inflation as “transitory,”

but as inflation

continued at increasing rates the Federal Reserve’s

policy changed.

The Federal Reserve announced a 25 basis point

increase in the target federal funds range on March 17, 2022, the first change

since March 2020 when the target was set to

0-0.25%.

Further increases were announced in 2022: 50 basis points on May 4, 75 basis points on each of June 15,

July 27,

September 21, and November 2, and 50 basis points on December 14, 2022.

During 2023, the Federal Reserve announced

additional target rate increases of 25 basis points on each of February 1,

2023, March 2022, May 3 and July 26, 2023.

The

federal funds target rate range remains at 5.25-5.50% at March 12, 2024.

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The Federal Reserve’s securities holdings in

its System Open Market Account (“SOMA”) increased from $4.1 trillion on

December 30, 2019 to $9.0 trillion at April 11, 2021,

largely as a result of securities purchases as the Federal Reserve

injected liquidity as a result of the COVID-19 pandemic.

On May 4, 2022, the Federal Reserve announced its plan to

reduce its securities holdings in an effort to reduce inflation:

●

Reinvestments of principal of maturing Treasury securities

would be reduced by $30 billion per month for three

months and thereafter would be $80 billion per month.

●

Reinvestments of principal of maturing agency debt and mortgage-backed securities

would be reduced by $17.5

billion per month for three months and thereafter would be $35 billion per month.

●

These declines would slow and then stop when the Federal Reserve’s

balance sheet was somewhat above the

balance it deemed ample.

The Federal Reserve’s SOMA

was $7.0 trillion on February 28, 2024 compared to $8.4 trillion on February 13, 2023.

The Federal Reserve seeks to target longer term inflation of 2%

based on annual changes in the personal consumption

expenditures.

The Federal Reserve stated on February 1, 2023 that its Federal Open Market Committee is highly attentive

to inflation risks and the war in Ukraine is contributing to elevated global uncertainty.

Inflation remained above that rate

through February 2023.

The Chairman of the Federal Reserve’s testimony

to the Senate Banking Committee on March 7,

2023 that inflation remains well above the target, gross domestic product

in 2022 was 0.9%, below the trend.

Higher rates

have adversely affected the housing sector and combined with slower output

growth, “appear to be weighing on business

fixed investment.”

The labor market is “extremely tight.”

The Chairman concluded:

“We continue to anticipate

that ongoing increases in the target range for the federal funds rate

will be appropriate in order

to attain a stance of monetary policy that is sufficiently restrictive to return inflation

to 2% over time. In addition, we are

continuing the process of significantly reducing the size of our balance sheet.

Although inflation has been moderating in

recent months, the process of getting inflation back down to 2% has a long

way to go and is likely to be bumpy.

As I

mentioned, the latest economic data have come in stronger than expected,

which suggests that the ultimate level of interest

rates is likely to be higher than previously anticipated. If the totality of the data

were to indicate that faster tightening is

warranted, we would be prepared to increase the pace of rate hikes. Restoring price

stability will likely require that we

maintain a restrictive stance of monetary policy for some time.”

Although the Federal Reserve Chairman continues to maintain the 2% long term target

inflation, he has indicated that the

Federal Reserve

is “data dependent” and that it could cut rates depending on the data and

whether recent declines in

inflation appear sustained, and alternatively,

raise rates if appropriate in pursuit of its long term target inflation.

The nature

and timing of these ongoing changes in monetary policies and their effects

on the Company and the Bank cannot be

predicted.

On March 12, 2023, as a result of unrealized securities losses resulting from increased

market rates, liquidity issues at two

banks with over $100 billion of assets which failed, the Federal Reserve established

a new Bank Term Funding Program

(“BTFP”).

The BTFP offered loans of up to one year to banks, savings associations, credit

unions, and other eligible

depository institutions pledging U.S. Treasuries, agency debt

and mortgage-backed securities, and other qualifying assets as

collateral. These assets were valued at par and the margin was 100%

of par. The BTFP expires March 11,

2024, except for

loans outstanding prior to its expiration.

The Company did not participate in the BTFP in 2023.

The Federal Reserve on March 12, 2023 stated that depository institutions also may obtain

liquidity against a wide range of

collateral through the Federal Reserve’s discount

window, which was available

with the same collateral margins as the

BTFP,

but which offers loans of up to 90 days.

Collateral is valued under the discount window is based on fair market

values,

collateral margins subsequently have been reduced to less than 100%

of collateral fair market value, with the

amount of discount depending on the type of collateral.

FDIC Insurance Assessments

The Bank’s deposits are insured

by the FDIC’s DIF,

and the Bank is subject to FDIC assessments for its deposit insurance.

Since 2011, and as discussed above under “Recent Regulatory

Developments”, the FDIC has been calculating assessments

based on an institution’s average consolidated

total assets less its average tangible equity (the “FDIC Assessment Base”) in

accordance with changes mandated by the Dodd-Frank Act.

The FDIC changed its assessment rates which shifted part of

the burden of deposit insurance premiums toward depository institutions relying on funding

sources other than deposits.

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In 2016, the FDIC again changed its deposit insurance pricing and eliminated all risk categories

and now uses “financial

ratios method” based on CAMELS composite ratings to determine assessment rates

for small established institutions with

less than $10 billion in assets (“Small Banks”).

The financial ratios method sets a maximum assessment for CAMELS 1

and 2 rated banks, and set minimum assessments for lower rated institutions.

All basis points are annual amounts.

The following table shows the FDIC assessment schedule for Small Banks, such as the

Bank, for the first assessment period

of 2023 to be billed in June 2023, which is the latest available:

Established Small Institution

CAMELS Composite

1 or 2

4 or 5

Initial Base Assessment Rule

5 to 18 basis points

8 to 32 basis points

18 to 32 basis points

Unsecured Debt Adjustment.

Cannot exceed the lesser of 5

basis points or 50% of the

bank’s initial FDIC

assessment rate

-5 to 0 basis points

Brokered Deposit

Adjustment

N/A

Total Base Assessment

Rate

2.5 to 18 basis points

4 to 32 basis points

13 to 32 basis points

As shown above. these assessments are adjusted based on the bank’s

CAMELS rating.

For example, Small Banks, with

CAMELS ratings of 1 or 2, have a current total assessment rate of 2.5 to 18 basis points for

the period to be billed in June

2023.

The FDIC issued a special assessment of 3.36 basis points for a projected eight quarters on large

banks with more than $5

billion of uninsured deposits as a result of the systemic risk determination to insure all depositors

in connection with the

March 2023 failures of Silicon Valley

Bank and Signature Bank.

These special assessments do not apply to the Bank.

The minimum FDIC’s DIF reserve ratio

is 1.35%, which was set by the Dodd-Frank Act.

The FDIC Board of directors is

required by the Federal Deposit Insurance Act to designate a reserve ratio before

the beginning of each calendar year.

There is no upper limit on the reserve ratio and thus, no statutory limit on the size of the fund. The

FDI Act provides for

dividends from the fund when the reserve ratio exceeds 1.5 percent, but grants the Board

sole discretion in determining

whether to suspend or limit the declaration or payment of dividends.

The reserve ratio reached 1.36% on September 30,

2018, exceeding the minimum requirement.

As a result, deposit insurance surcharges on Large Banks ceased,

and smaller

banks received credits against their deposit assessments from the FDIC for

their portion of assessments that contributed to

the growth in the reserve ratio from 1.15% to 1.35%.

The Bank’s credit was $0.2

million, and was received and applied

against the Bank’s deposit insurance assessments

during 2019 and 2020.

Because of the extraordinary growth in deposits in the first six months of 2020

due to the pandemic and government

stimulus, the DIF’s reserve ratio declined

below 1.35% to 1.30%. The FDIC issued a restoration plan on September 15,

2020 designed to restore the reserve ratio to at least the statutory minimum of 1.35%

within 8 years. Although the FDIC, at

that time,

maintained its then current assessment rates, the FDIC may increase deposit assessment

rates by up to two basis

points without notice, or more following notice and a comment period,

to meet the required reserve ratio.

The designated

reserve ratio has been 2% since 2010, and was set at this same level for 2024.

On June 22, 2020, the FDIC issued a final rule designed to mitigate the deposit insurance

assessment effect of the PPP and

the related liquidity programs (the “PPPLF”) established by the Federal

Reserve. Specifically, the rule

removes the effects

of participating in PPP and liquidity facilities from the various risk measures used

to calculate assessment rates and

provides an offset to assessments for the increase in assessment base rates attributed

to participation in the PPP and

liquidity facilities. This had a limited effect on the Bank since it had only one PPP

loan of approximately $0.1 million

outstanding on December 31, 2023, and because the Bank never participated in the PPPLF.

The Company recorded FDIC insurance premiums expenses of $0.5 and $0.3

million in 2023 and 2022, respectively, which

reflects the FDIC’s amended restoration

plan increases in the initial base deposit insurance assessment rate schedules

uniformly by 2 basis points, beginning with the first quarterly assessment period of 2023.

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Lending Practices

CRE

The federal bank regulatory agencies released guidance in 2006

on “Concentrations in Commercial Real Estate Lending”

(the “CRE Guidance”).

The CRE Guidance defines CRE loans as exposures secured by raw land, land development

and

construction (including 1-4 family residential construction), multi-family property,

and non-farm nonresidential property

where the primary or a significant source of repayment is derived from rental income associated

with the property (that is,

loans for which 50% or more of the source of repayment comes from third party,

non-affiliated, rental income) or the

proceeds of the sale, refinancing, or permanent financing of this property.

Loans to REITs and unsecured

loans to

developers that closely correlate to the inherent risks in CRE markets

would also be considered CRE loans under the CRE

Guidance.

Loans on owner occupied CRE are generally excluded.

In December 2015, the Federal Reserve and other bank

regulators issued an interagency statement to highlight prudent risk management

practices from existing guidance that

regulated financial institutions and made recommendations regarding

maintaining capital levels commensurate with the

level and nature of their CRE concentration risk.

The CRE Guidance requires that banks have appropriate processes be in place to identify,

monitor and control risks

associated with real estate lending concentrations.

This could include enhanced strategic planning, CRE underwriting

policies, risk management, internal controls, portfolio stress testing and risk exposure

limits as well as appropriately

designed compensation and incentive programs.

Higher allowances for loan losses and capital levels may also be required.

The CRE Guidance is triggered when either:

●

Total reported

loans for construction, land development, and other land of 100% or more of a bank’s

total capital;

●

Total reported

loans secured by multifamily and nonfarm nonresidential properties and loans

for construction, land

development, and other land are 300% or more of a bank’s

total risk-based capital.

This CRE Guidance was supplemented by the Interagency Statement on Prudent Risk

Management for Commercial Real

Estate Lending (December 18, 2015).

The CRE Guidance also applies when a bank has a sharp increase in CRE loans or

has significant concentrations of CRE secured by a particular property type. See “Management’s

Discussion and Analysis

of Financial Condition and Results of Operations - Balance Sheet Analysis” for

concentrations of the various types of CRE

loans.

At December 31, 2023, the Bank had outstanding $68.3 million in construction and land

development loans and $293.0

million in total CRE loans (excluding owner occupied properties), which represent approximately

62% and 264%,

respectively, of the Bank’s

total risk-based capital at December 31, 2023.

The Company has always had significant

exposures to loans secured by commercial real estate due to the nature of its markets and the

loan needs of both its retail

and commercial customers.

The Company believes its long-term experience in CRE lending, underwriting

policies,

internal controls, and other policies currently in place, as well as its loan and credit

monitoring and administration

procedures, are generally appropriate to manage its concentrations as required under

the Guidance.

The Federal Reserve joined the other depository institution regulators in issuing a Policy Statement

on Prudent Commercial

Real Estate Loan Accommodations and Workouts

on June 30, 2023.

This Policy Statement builds on and updates existing

guidance to enable financial institutions to work prudently and constructively

with creditworthy borrowers during times of

financial stress.

The Policy Statement provides a broad set of risk management principles relevant

to CRE short term loan

accommodations and longer term workouts in all business cycles, particularly in challenging

economic environments.

states that the regulatory agencies expect their examiners to take a balanced approach

in assessing the adequacy of a

financial institution's risk management practices for loan accommodation and

workout activities.

Financial institutions that

implement prudent CRE loan accommodation and workout arrangements after

performing a comprehensive review of a

borrower's financial condition will not be subject to criticism for engaging in these efforts,

even if these arrangements result

in modified loans that have weaknesses that result in adverse classification. In addition,

modified loans to borrowers who

have the ability to repay their debts according to reasonable terms will not be subject

to adverse classification solely

because the value of the underlying collateral has declined to an amount that is less than the

outstanding loan balance.

The

Policy Statement also describes the classifications of CRE loan accommodations and

workouts and addresses regulatory

accounting and reporting in such situations, including CECL.

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Leveraged Lending

In 2013, the Federal Reserve and other banking regulators issued their “Interagency Guidance

on Leveraged Lending”

highlighting standards for originating leveraged transactions and

managing leveraged portfolios, as well as requiring banks

to identify their highly leveraged transactions, or HLTs.

The Government Accountability Office issued a statement on

October 23, 2017 that this guidance constituted a “rule” for purposes of the Congressional

Review Act, which provides

Congress with the right to review the guidance and issue a joint resolution for signature

by the President disapproving it.

No such action was taken, and instead, the federal bank regulators issued a September

11, 2018 “Statement Reaffirming

the

Role of Supervisory Guidance.”

This Statement indicated that guidance does not have the force or effect of law or

provide

the basis for enforcement actions, but this guidance can outline supervisory agencies’

views of supervisory expectations and

priorities, and appropriate practices.

The federal bank regulators continue to identify elevated risks in leveraged loans and

shared national credits.

The Bank did not have any loans at year-end 2023 or 2022

that were leveraged loans subject to the Interagency Guidance

on Leveraged Lending or that were shared national credits.

Other Dodd-Frank Act Provisions

In addition to the capital, liquidity and FDIC deposit insurance changes discussed above,

some of the provisions of the

Dodd-Frank Act we believe may affect us are set forth below.

Executive Compensation, etc.

The Dodd-Frank Act provides shareholders of all public companies with a say on executive

compensation.

Under the

Dodd-Frank Act, each company must give its shareholders the opportunity to

vote on the compensation of its executives, on

a non-binding advisory basis, at least once every three years.

The Dodd-Frank Act also adds disclosure and voting

requirements for golden parachute compensation that is payable to named executive

officers in connection with sale

transactions.

The SEC is required under the Dodd-Frank Act to issue rules obligating companies to disclose in proxy

materials for annual

shareholders meetings, information that shows the relationship between executive compensation

actually paid to their

named executive officers and their financial performance, taking into

account any change in the value of the shares of a

company’s stock and dividends or

distributions.

The Dodd-Frank Act also provides that a company’s

compensation

committee may only select a consultant, legal counsel or other advisor on

methods of compensation after taking into

consideration factors to be identified by the SEC that affect the independence

of a compensation consultant, legal counsel

or other advisor.

Section 954 of the Dodd-Frank Act added section 10D to the Exchange Act.

Section 10D directs the SEC to adopt rules

prohibiting a national securities exchange or association from listing a company

unless it develops, implements, and

discloses a policy regarding the recovery or “claw-back” of executive compensation

in certain circumstances.

The policy

must require that, in the event an accounting restatement due to material noncompliance

with a financial reporting

requirement under the federal securities laws, the company will recover from any current

or former executive officer any

incentive-based compensation (including stock options) received during

the three year period preceding the date of the

restatement, which is in excess of what would have been paid based on the restated

financial statements.

There is no

requirement of wrongdoing by the executive, and the claw-back is

mandatory and applies to all executive officers.

Section

954 augments section 304 of the Sarbanes-Oxley Act, which requires the CEO and

CFO to return any bonus or other

incentive- or equity-based compensation received during the 12

months following the date of similarly inaccurate financial

statements, as well as any profit received from the sale of employer securities during the period,

if the restatement was due

to misconduct.

Unlike section 304, under which only the SEC may seek recoupment, the Dodd

-Frank Act requires the

Company to seek the return of compensation.

The SEC adopted, effective January 27, 2023, Commission Rule 10D-1 under the Exchange

Act, which requires each

national securities exchange to adopt listing standards for the recovery of erroneously

awarded executive compensation.

The Commission approved Nasdaq Listing Rule 5608 (“Rule 5608”) on June 9,

2023.

Under Rule 10D-1, listed companies

must recover from current and former executive officers’ incentive-based

compensation received during the three

completed fiscal years preceding the date on which the issuer is required to prepare

an accounting restatement.

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Under these SEC and Nasdaq rules, the recovery of erroneously awarded compensation

is required on a “no fault” basis,

without regard to whether any misconduct occurred or an executive officer’s

responsibility for the erroneous financial

statements. A restatement due to material noncompliance with any financial

reporting requirement under the securities laws

triggers application of the recovery policy.

The determination regarding materiality of an error should be based on facts and

circumstances and existing judicial and administrative interpretations. The

proposed Nasdaq Rule requires recovery for

restatements that correct errors that are material to previously issued financial statements (commonly

referred to as “Big R”

restatements), as well as for restatements that correct errors that are not

material to previously issued financial statements

but would result in a material misstatement if the errors were left uncorrected

in the current report or the error correction

was recognized in the current period (commonly referred to as “little r” restatement).

Nasdaq-listed companies, such as the Company,

are required to recover the amount of incentive-based compensation

received by an executive officer that exceeds the amount the executive officer

would have received had the incentive-based

compensation been determined based on the accounting restatement, computed

without regard to any taxes paid.

Nasdaq

defines “incentive-based compensation” as any compensation that is granted,

earned or vested based wholly or in part upon

the attainment of any “financial reporting measure.”

Incentive-based compensation is deemed received on or after October

2, 2023 and in the fiscal period during which the financial reporting measure specified in

the incentive-based compensation

award is attained, even if the grant or payment of the incentive-based compensation

occurs after the end of that period.

The Company adopted an Erroneously Awarded

Executive Incentive Based Compensation Policy effective December

2023 to comply with these rules.

The SEC adopted a rule in August 2013 to implement pay ratios pursuant to Section 953

of the Dodd-Frank Act comparing

their CEO’s total compensation to the median compensation

of all other employees.

These rules applied beginning to fiscal

year 2017 annual reports and proxy statements.

Smaller reporting companies, such as the Company,

are exempted from

this rule.

The Dodd-Frank Act, Section 955, requires the SEC, by rule, to require that each company

disclose in the proxy materials

for its annual meetings whether an employee or board member is permitted to purchase

financial instruments designed to

hedge or offset decreases in the market value of equity securities granted

as compensation or otherwise held by the

employee or board member.

The SEC adopted

changes to its Reg. S-K Item 407(i) implementing this Section.

The

Company expects to adopt appropriate policies upon shareholder

approval an equity incentive plan at the Annual

Stockholders’ meeting in 2024.

The Company’s has had no equity-based compensation

plans or arrangements, but expects to seek stockholder approval of

an equity incentive plan at the Annual Stockholders’ meeting in 2024.

The Company’s insider trading policy,

which

applies to all Company and Bank directors, officers, employees and certain independent

contractors and specified related

persons (collectively,

“Covered Persons”).

This Policy prohibits Covered Persons, from short-selling Company securities

or engaging in transactions involving Company “Derivative Securities.”

This prohibition includes, without limitation,

trading in Company-based put option contracts, including straddles, and the like.

Derivative Securities include options,

warrants, restricted stock units, stock appreciation rights or similar rights whose value is derived

from the value of an

equity or other security, including

Company Securities.

Section 956 of the Dodd-Frank Act prohibits incentive-based compensation arrangements

that encourage inappropriate risk

taking by covered financial institutions, are deemed to be excessive, or that

may lead to material losses.

In June 2010, the

federal bank regulators adopted Guidance on Sound Incentive Compensation Policies,

which, although targeted to larger,

more complex organizations than the Company,

includes principles that have been applied to smaller organizations

similar

to the Company.

This Guidance applies to incentive compensation to executives as well

as employees, who, “individually

or a part of a group, have the ability to expose the relevant banking organization to

material amounts of risk.”

Incentive

compensation should:

●

Provide employees incentives that appropriately balance risk and reward;

●

Be compatible with effective controls and risk-management;

and

●

Be supported by strong corporate governance, including active and effective

oversight by the organization’s

board

of directors.

The federal bank regulators stated that this Guidance is expected to generally have

less effect on smaller banking

organizations, which typically are less complex and

make less use of incentive compensation arrangements than larger

banking organizations.

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The federal bank regulators, the SEC and other regulators proposed regulations implementing

Section 956 in April 2011,

which would have been applicable to, among others, depository institutions and

their holding companies with $1 billion or

more in assets.

An advance notice of a revised proposed joint rulemaking under Section 956

was published by the financial

services regulators in May 2016, but these rules have not been adopted.

Following the failures of Silicon Valley

Bank and Signature Bank in early March 2023, Senator Elizabeth Warren

and co-

sponsors, filed S.1045 “Failed Bank Executives Clawback Act.”

This bill provides that when a bank is placed into FDIC

receivership, all or part of the compensation paid the previous five

years to an institution-affiliated party responsible for the

condition of the institution must be paid to FDIC to prevent unjust enrichment and to assure

that the party bears losses

consistent with their responsibility.

Compensation includes salary,

bonuses, awards, and profits from buying or selling

securities.

The bill also expands the FDIC’s authority to

claw back compensation of parties responsible for financial losses

incurred by a financial company regardless of the process by which FDIC is appointed receiver.

Debit Card Interchange

Fees

The “Durbin Amendment” to the Dodd-Frank Act and implementing Federal Reserve regulations

provide that interchanged

transaction fees for electronic debit transactions be “reasonable” and proportional

to certain costs associated with

processing the transactions.

The Durbin Amendment and the Federal Reserve rules thereunder are not applicable

to banks

with assets less than $10 billion, however such banks compete with banks that are subject

to the Durbin Amendment, and

therefore may have to limit their interchange fees, also.

Other Legislative and Regulatory Changes

Various

legislative and regulatory proposals, including substantial changes in banking,

and the regulation of banks, thrifts

and other financial institutions, compensation, and the regulation of financial markets and their

participants, and financial

instruments and securities, and the regulators of all of these, as well as the taxation of these

entities, are being considered by

the executive branch of the federal government, Congress and various state governments,

including Alabama.

President Biden froze new rulemaking generally when he became President in January 2021,

and rescinded various of his

predecessor’s executive orders, including the February 3, 2017

executive order containing “Core Principles for Regulating

the United States Financial System” (“Core Principles”).

The Core Principles directed the Secretary of the Treasury

consult with the heads of Financial Stability Oversight Council’s

members and report to the President periodically

thereafter on how laws and government policies promote the Core Principles

and to identify laws, regulations, guidance and

reporting that inhibit financial services regulation.

The President has also issued an Executive Order 14036 on Promoting Competition in

the American Economy (July 9,

2021), which may affect the federal bank regulators’ reviews of bank and

bank holding company mergers.

The OCC, the

FDIC and the CFPB have made proposals to further scrutinize mergers, especially

where the confirming institutions have

assets greater than $100 million.

The President’s Working

Group and various agencies have also been working on the

regulation of crypto assets, including stable coins, and access to the payments

system.

The DoJ’s Antitrust Division of the United

States and the Federal Trade

Commission issued revised Merger Guidelines on

December 18, 2023.

The DoJ, the Federal Reserve and the OCC have confirmed that these new Guidelines

did not modify

the 1995 Bank Merger Guidelines, however.

Representatives of the Federal Reserve have indicated that updated Bank

Merger Guidelines are being considered.

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The 2018 Growth Act, which, was enacted on May 24, 2018, amended the Dodd-Frank

Act, the BHC Act, the Federal

Deposit Insurance Act and other federal banking and securities laws to provide

regulatory relief in these areas:

●

consumer credit and mortgage lending;

●

capital requirements;

●

Volcker

Rule compliance;

●

stress testing and enhanced prudential standards;

●

increased the asset threshold under the Federal Reserve’s

Small BHC Policy from $1 billion to $3 billion; and

●

capital formation.

We believe the 2018

Growth Act has positively affected our business.

The following provisions of the 2018 Growth Act

may be especially helpful to banks of our size after regulations were adopted in 2019:

●

“qualifying community banks,” defined as institutions with total consolidated

assets of less than $10 billion, which

meet a “community bank leverage ratio, which is currently 9.0%, may be deemed

to have satisfied applicable risk-

based capital requirements as well as the capital ratio requirements;

●

section 13(h) of the BHC Act, or the “Volcker

Rule,” is amended to exempt from the Volcker

Rule, banks with

total consolidated assets valued at less than $10 billion (“community banking organizations”),

and trading assets

and liabilities comprising not more than 5.00% of total assets; and

●

“reciprocal deposits” will not be considered “brokered deposits” for FDIC purposes,

provided such deposits do not

exceed the lesser of $5 billion or 20% of the bank’s total liabilities.

On July 9, 2019, the federal banking agencies, together with the SEC and the Commodities

Futures Trading Commission

(“CFTC”), issued a final rule excluding qualifying community banking organizations

from the Volcker

Rule pursuant to the

2018 Growth Act. The Volcker

Rule change may enable us to invest in certain collateralized loan obligations that are

treated as “covered funds” and other investments prohibited to banking entities by the Volcke

Rule.

The FDIC announced on December 19, 2018 a final rule allows reciprocal deposits to be excluded

from “brokered

deposits” up to the lesser of $5 billion or 20% of their total liabilities.

Institutions that are not both well capitalized and

well rated are permitted to exclude reciprocal deposits from brokered

deposits in certain circumstances.

The FDIC issued comprehensive changes to its brokered deposit rules effective

April 1, 2021. The revised rules establish

new standards for determining whether an entity meets the statutory definition of

“deposit broker,” and identifies a number

of businesses that automatically meet the “primary purpose exception”

from a “deposit broker.”

The revisions also provide

an application process for entities that seek a “primary purpose exception,” but do not

meet one of the designated

exceptions.”

The new rules may provide us greater future flexibility,

but we had no brokered deposits at December 31,

2021 or 2022, and historically have not relied on brokered deposits.

Reciprocal deposits have expanded our funding and liquidity sources without being

subjected to FDIC limitations and

potential federal deposit insurance assessment increases for brokered

deposits.

The applicable agencies also issued final rules simplifying the Volcker

Rule’s proprietary trading restrictions

effective

January 1, 2020. On June 25, 2020, the agencies adopted a final rule simplifying the Volcker

Rule’s covered fund

provisions effective October 1, 2020.

On November 30, 2020, the bank regulators issued a statement urging banks

to cease entering into new contracts using U.S.

dollar LIBOR rates as soon as practicable and in any event by December 31, 2021,

to effect orderly, and safe and sound

LIBOR transition. Banks were reminded that operating with insufficient

fallback interest rates could undermine financial

stability and banks’ safety and soundness.

Any alternative reference rate may be used that a bank determines is appropriate

for its funding and customer needs.

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The Alabama legislature passed the “LIBOR Discontinuance and Replacement

Act of 2021” which became effective on

April 29, 2021.

On March 15, 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act (the “LIBOR

Act”) as

part of the Consolidated Appropriations Act, 2022.

One purpose of the LIBOR Act was to establish a clear and uniform

process, on a nationwide basis, for replacing LIBOR in existing contracts the terms of which do

not provide for the use of a

clearly defined or practicable replacement benchmark rate, without affecting

the ability of parties to use any appropriate

benchmark rate in new contracts.

The LIBOR Act directed the Federal Reserve to issue regulations implementing the

LIBOR Act.

The Federal Reserve adopted final Regulation ZZ on January 26, 2023.

These together with Internal Revenue

Service regulation facilitate the conversion of existing LIBOR-based loans

when most popular LIBOR rates cease to be

quoted on June 30, 2023.

The Bank generally prices its variable rate loans based on the prime rate or the five-year Treasury

note rate and had no

loans bearing LIBOR or other IBOR-based rates at December 31, 2022.

Therefore, the transition from LIBOR did not

affect the Bank’s loan portfolio.

Certain of these new rules, and proposals, if adopted, could significantly change the regulation

or operations of banks and

the financial services industry.

New regulations and statutes are regularly proposed that contain wide-ranging proposals

for

altering the structures, regulations and competitive relationships of the nation’s

financial institutions.

ITEM 1A. RISK FACTORS

Any of the following risks could harm our business, results of operations and financial condition

and an investment in our

stock.

The risks discussed below also include forward-looking statements, and our

actual results may differ substantially

from those discussed in these forward-looking statements.

Risk Factor Summary

The following summarizes the risks provided after this summary and is qualified

by the more detailed discussion of “Risk

Factors” that follows this Summary,

and which should be read in their entirety.

Our risks include operational risks,

financial risks and legal and regulatory risks, which are related and intertwined

as discussed more fully in the Risk Factors

that follow this summary.

Operational risks are inherent in our business, and include:

●

The effects of local, national and regional market and economic conditions and

cyclicality, including inflation,

interest rates and their effects on borrowers and markets, including real estate

markets

●

The risks and costs of nonperforming assets

●

Our allowance for credit losses is based on estimates and judgments and may prove to be

inadequate to our credit

risks

●

The soundness of other financial institutions and perceptions regarding our industry,

especially when other banks

experience difficulties or fail

●

Our concentrations in commercial real estate loans in our market

●

We operate

in a highly competitive market against a number of larger national and regional

competitors

●

Future acquisitions may disrupt our business, dilute shareholder value and adversely affect

our operating results

and financial condition, among other risks

●

Technological changes affect

our business, and we may have fewer resources than various of our larger

regulated

and unregulated competitors, inside and outside our market area,

which may increase the competition we face

●

Potential gaps in our risk management, including managing the risks to us of data

security and cybersecurity,

including risks to our service providers could affect our results of operations, financial

condition, customer

relationship and reputation

●

Our ability to attract and retain key people

●

Risks of severe weather, natural disasters, climate changes,

epidemics and severe health issues in the population,

wars and acts of terrorism and other events

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Financial risks result in part from our operational risks and the risk of our business, and include:

●

Increases in costs of funds due to inflation, monetary and fiscal policies, changes in

costumer behaviors and

competitive pressures

●

Our results of operations and financial condition, including the values of our assets and liquidity,

may be affected

by changes in interest rates and interest rate levels, the shape of the yield curve and economic conditions

●

Liquidity risks, including the costs and availability of funding, and the liquidity of our assets,

including our

investment securities portfolio, and institutional lending sources

●

Changes in accounting and tax rules

●

The adequacy of our capital and availability of capital, if needed

●

Potentially excessive risk taking by our associates

●

Our ability to pay dividends depends on our earnings, liquidity and regulatory requirements

related to our capital

and our risks

●

A limited trading market exists for our common stock

Legal and regulatory risks include:

●

The Company is a legal entity separate and distinct from the Bank, and transactions

between the Bank and the

Company are limited by law

●

The Company is required to be a source of financial and managerial strength to

the Bank, even where further

investment in the Bank may not be warranted in the circumstances

●

The scope, volume and complexity of regulations and regulatory and legal changes affect

us, increase the time and

costs of compliance and may limit our business and adversely affect our

financial condition and results of

operations

●

Litigation, investigations and other claims by government agencies and private parties and

regulatory actions,

including those related to assertions of compliance failures

●

The amount of and changes in the capital we are required to maintain in respect of our business

and risk, and

regulatory perceptions of us and our industry

●

Liquidity requirements

Operational Risks

Market conditions and economic cyclicality may adversely affect our industry.

We believe the following,

among other things, may affect us in 2024:

●

The COVID-19 pandemic disrupted the economy beginning late in the first quarter of 2020.

Auburn University,

government agencies and businesses were limited to remote work and gatherings

were limited.

Supply chains

continue to be disrupted and labor markets remain tight.

Hotels, motels, restaurants, retail and shopping centers

were especially affected.

COVID-19 continues, but with diminishing direct economic effects

due to population

health, generally.

President Biden has terminated the COVID-19 national emergencies

effective May 11, 2023.

●

Extraordinary monetary and fiscal stimulus in 2020 and in early 2021

offset certain of the pandemic’s adverse

economic effects, but together with supply chain disruptions,

continued consumer demand, Russia’s invasion

Ukraine and its effects on energy and food prices, and tight labor

markets, have resulted in inflation.

Inflation is

running at levels unseen in decades and well above the Federal Reserve’s

long term inflation goal of 2.0%

annually.

Beginning in March 2022, the Federal Reserve has been raising target

federal funds interest rates and

reducing its securities holdings in an effort to reduce inflation.

The nature and timing of any future changes in

monetary and fiscal policies and their effect on us cannot be predicted.

At the end of 2023, many believed that the

Federal Reserve would loosen its monetary policy in response to inflation,

which was declining, but remained

above the Fed’s 2% long term target

level.

Strong economic data and inflation reports since then appear to have

reduced expectations as to the number, timing and size of

any reductions in the target federal funds rate in the near

term.

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●

Market developments, including unemployment, price levels, stock and

bond market volatility, and changes,

including those resulting from Russia’s

invasion of Ukraine affect consumer confidence levels, economic

activity

and inflation.

Increases in market interest rates, inflation and consumer and business confidence

may cause

changes in customers’ savings and payment behaviors, including potential increases in

loan delinquencies and

default rates.

These could affect our earnings and credit quality.

●

Our ability to assess the creditworthiness of our customers and those we do business

with, and the values of our

assets and loan collateral may be adversely affected and less

predictable as a result of inflation and higher market

interest rates

We adopted

CECL on January 1, 2023 as required by generally accepted accounting principles

(“GAAP”).

CECL changed the loss model to take into account current expected credit losses in place

of the

incurred loss method used historically under GAAP.

This changes the process we use to estimate losses inherent

in our credit exposures.

The process for estimating expected losses requires difficult,

subjective, and complex

judgments, including forecasts of economic conditions and how those economic predictions

might affect the

ability of our borrowers to repay their loans or the value of assets.

Changes in economic conditions and factors

used in our CECL models may increase the variability of our provisions for loan losses and

our earnings.

Nonperforming and similar assets take significant time to resolve

and may adversely affect our results of operations

and

financial condition.

Our nonperforming loans were 0.16% of total loans as of December

31, 2023, and we had no other real estate owned as

result of foreclosures or otherwise in full or partial payments in respect of loans (“OREO”).

Non-performing assets may

adversely affect our net income in various ways.

We do

not record interest income on nonaccrual loans or OREO and these

assets require higher loan administration and other costs, thereby adversely affecting

our income.

Decreases in the value of

these assets, or the underlying collateral, or in the related borrowers’ performance or financial

condition, whether or not due

to economic and market conditions beyond our control, could adversely affect

our business, results of operations and

financial condition.

In addition, the resolution of nonperforming assets requires commitments of time

from management,

which can be detrimental to the performance of their other responsibilities. Our non-performing

assets may be adversely

affected by loan deferrals and modifications made in response

to the pandemic and the moratoria on foreclosures and

evictions.

There can be no assurance that we will not experience increases in nonperforming

loans in the future, much of

which is affected by the economy and the levels of interest rates, generally.

Our allowance for loan losses may prove inadequate

or we may be negatively affected by credit risk exposures.

We periodically review our

allowance for loan losses for adequacy considering economic conditions and trends,

collateral

values and credit quality indicators, including past charge-off experience and

levels of past due loans and nonperforming

assets.

We cannot be

certain that our allowance for loan losses will be adequate over time to cover

credit losses in our

portfolio because of unanticipated adverse changes in the economy,

including the continuing effects of the pandemic and

fiscal and monetary response to COVID-19 and the shift beginning in March 2022

from an extraordinarily expansionary

monetary policies to a tightening monetary policy to fight inflation,

market conditions or events adversely affecting specific

customers, industries or markets, including disruptions of supply chains and the

war in Ukraine, and changes in borrower

behaviors.

Certain borrowers and their businesses and real estate and commercial projects

and businesses may be adversely

affected by inflation and higher interest rates, and economic slowdowns

arising from tighter monetary policies, and may

request or need loan modifications and deferrals.

Various

businesses will be unable to fully pass on increased costs due to

inflation, and their profits may shrink.

If the credit quality of our customer base materially decreases, if the risk profile

the market, industry or group of customers changes materially or weaknesses in the real estate

markets worsen, borrower

payment behaviors change, or if our allowance for loan losses is not adequate, our business,

financial condition, including

our liquidity and capital, and results of operations could be materially adversely affected.

CECL, a new accounting

standard for estimating expected future loan losses, is effective for

the Company beginning January 1, 2023, and its effects

upon the Company in the current environment have not yet been determined

fully due to its short existence.

The CECL

model incorporates various economic condition elements, where changes

in fiscal and monetary policy, as

well as market

interest rates, could result in more volatility in our provisions for loan losses

under CECL, which could adversely affect our

net income.

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Changes in the real estate markets, including the

secondary market for residential mortgage loans, may continue

adversely affect us.

Beginning in March 2022, inflation and the Federal monetary policies to increase interest rates

to fight inflation have

caused mortgage rates to increase significantly.

Higher interest rates and the increased level of housing costs as a result

the COVID-19 pandemic, have caused housing starts and sales to slow.

Inventories of existing homes for sale have

remained generally low, and

many believe that higher mortgage rates are adversely affecting potential

sellers from selling

their existing houses and incurring higher mortgage interest rates on their replacement

home.

These conditions have

adversely affected housing affordability and increased

monthly mortgage payments.

House prices have begun to decline in

certain markets from their earlier highs.

This adversely affects our mortgage loan productions and the value of residential

mortgage collateral.

Commercial real estate projects’ economic assumptions may be adversely affected,

and certain

projects with short term and/or unhedged variable rate debt may be especially affected

by increased interest rates and a

slower economy.

The CFPB’s mortgage and servicing rules, including

TRID rules for closed end credit transactions, enforcement actions,

reviews and settlements, affect the mortgage markets and our mortgage operations.

The CFPB requires that lenders

determine whether a consumer has the ability to repay a mortgage loan have limited the

secondary market for and liquidity

of many mortgage loans that are not “qualified mortgages.”

Recently adopted changes to the CFPB’s

qualified mortgage

rules are reportedly being reconsidered.

The Tax Cuts and Jobs

Act’s (the “2017 Tax

Act”) limitations on the deductibility of residential mortgage interest and state

and local property and other taxes and federal moratoria on single-family

foreclosures and rental evictions could adversely

affect consumer behaviors and the volumes of housing sales,

mortgage and home equity loan originations, as well as the

value and liquidity of residential property held as collateral by lenders such as the Bank, and

the secondary markets for

single and multi-family loans.

Acquisition, construction and development loans for residential development

may be

similarly adversely affected.

Fannie Mae and Freddie Mac (“GSEs”) have been in conservatorship since September

2008.

Since Fannie Mae and

Freddie Mac dominate the residential mortgage markets, any changes in their operations

and requirements, as well as their

respective restructurings and capital, could adversely affect the

primary and secondary mortgage markets, and our

residential mortgage businesses, our results of operations and the returns on capital deployed

in these businesses.

The

timing and effects of resolution of these government sponsored enterprises

cannot be predicted.

We may be contractually

obligated to repurchase

mortgage loans we sold to third parties on terms unfavorable

to us.

As part of its routine business, the Company originates mortgage loans that it subsequently

sells in the secondary market,

generally to Fannie Mae, a GSE.

In connection with the sale of these loans, the Company makes customary representations

and warranties, the breach of which may result in the Company being required to

repurchase the loan or loans.

Furthermore, the amount paid may be greater than the fair value of the loan or loans at the time of the

repurchase.

Although mortgage loan repurchase requests made to us have been limited, if these increased,

we may have to establish

reserves for possible repurchases and adversely affect our results of operation

and financial condition.

Mortgage servicing rights requirements

may change and require

us to incur additional costs and risks.

The CFPB’s residential mortgage servicing

standards may adversely affect our costs to service residential

mortgage loans.

The effects of reduced housing starts and mortgage activity due to

higher market interest rates, have decreased our

generation of new mortgage loans and related MSRs.

This may be offset partially by decreases in mortgage prepayments

and refinancings, and corresponding increases in the duration of our existing MSRs

and their values.

This net effect could

reduce our aggregate income from servicing these types of loans and make it more difficult

and costly to timely realize the

value of collateral securing such loans upon a borrower default.

The Basel III Rules relating to MSRs may also increase the

potential capital required as a result of MSRs, when considered with other capital rule adjustments

and deductions.

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The soundness of other financial institutions could adversely affect us.

We routinely execute

transactions with counterparties in the financial services industry,

including brokers and dealers,

central clearinghouses, banks, including our correspondent banks and other

financial institutions.

Our ability to engage in

routine investment and banking transactions, as well as the quality and values of our investments in

holdings of other

obligations of other financial institutions such as the FHLB-Atlanta, could be adversely

affected by the actions, financial

condition, and profitability of such other financial institutions, including the FHLB-Atlanta

and our correspondent banks.

Financial services institutions are interrelated as a result of shared credits,

trading, clearing, counterparty and other

relationships.

Most LIBOR reference interest rates used by many financial institutions to

price extensions of credit stopped

being quoted June 30, 2023 and their use has been strongly discouraged by regulatory agencies.

Most banks did not adopt

CECL until January 1, 2023.

The failures of Silicon Valley

Bank, Signature Bank and First Republic Bank in 2023 due to concentrations of deposits and

depositors holding large amounts of deposits in excess of FDIC insurance limits,

as well as flawed business models and

management, adversely affected the financial system and public confidence.

These have resulted in increased regulatory

scrutiny of bank liquidity, funding and

capital, depressed bank stock values generally,

and higher FDIC deposit insurance

premiums on the largest banks, as well as regulatory proposals to increase large

banks’ capital and expand enhanced

prudential standards starting at $100 billion of assets instead of $250 billion.

The federal bank regulators have been advocating more use of the Federal Reserve discount

window to improve bank

liquidity.

At the same time, these bank failures, together with the failure of the very small

Heartland State bank in Kansas

due to apparent embezzlement by its president due to losses from his personal crypto trading,

have also led to calls to

reduce Federal Home Loan Bank lending to banks.

Traditionally,

the Federal Home Loan Banks have been stable sources

of liquidity and funding for banks. The Federal Housing Finance Agency (“FHFA)

regulates the Federal Home Loan

Banks.

The FHFA’s

FHLBank System at 100: Focusing on the Future

(Nov. 2023) suggest less traditional Federal

Home

Loan Bank lending to banks, especially banks experiencing financial stress.

These changes, together with any exposures other institutions may have

to crypto or digital assets, or cybersecurity and data

breaches, could cause disruption and unexpected changes in the industry.

Any losses, defaults by, or failures of, the

institutions we do business with could adversely affect our holdings of

the equity in such other institutions, our

participation interests in loans originated by other institutions, and our business,

including our liquidity,

financial condition

and earnings.

Failures of several banks earlier in 2023

and in early 2024 have resulted in increased

market volatility for financial service

companies’

securities

and

changes

regulatory

views

and

emphases

that

may

adversely

affect

and

may

not

disclosable under law.

The failures of

Silicon Valley

Bank, Signature Bank,

First Republic

and Heartland

Tri-State Bank

in 2023 have

resulted in

significant

market

volatility

for

bank

stocks,

and

have

caused

uncertainty

the

investor

community

and

among

bank

customers, generally,

greater bank regulatory scrutiny

of banking organizations,

especially those experiencing

rapid growth

and

regional

banks

with

$100

billion

assets.

Similarly

concerns

about

credit

quality

and

capital

adequacy

New York

Community Bank following

two acquisitions raised

market concerns and led to

replacement of management and

a dilutive equity capital raise.

Changes

regulations

have

been

proposed

as part

the Basel

III

endgame

the capital,

liquidity,

long

term

debt

and

resolution planning

of banking

organizations

with over

$100 billion

in assets.

These failures

also have

resulted in

market

volatility in

financial services

securities.

Regulators have

focused supervisory

activities, generally,

at all

sizes of

banking

organizations

various

risks,

especially

capital

adequacy

and

liquidity

light

growth,

asset,

liability

and

customer

concentrations

and

risks;

CRE,

levels

uninsured

deposits;

crypto

businesses

and

customers;

strategic,

capital

and

liquidity

plans

and

contingency

plans;

and

risk

management.

Such

enhanced

scrutiny

often

applied

part

the

regulatory examination

processes, as

well as

through a

variety of

nonpublic supervisory

actions such

as “matters

requiring

attention,”

board

director

resolutions,

memoranda

understanding,

and

other

regulatory

criticism

and

informal

supervisory actions.

The bank

and bank

holding examination

processes, as

well as

any nonpublic

supervisory actions,

are

“confidential supervisory information”

for regulatory purposes,

whose existence and terms,

if any,

may not be disclosed

banking organizations.

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Our concentration of commercial real

estate loans could result in further increased

loan losses, and adversely affect our

business, earnings, and financial condition.

Commercial real estate, or CRE, is cyclical and poses risks of possible loss due to concentration

levels and the risks of the

assets being financed, which include loans for the acquisition and development of land and

residential construction.

The

federal bank regulatory agencies released guidance in 2006 on “Concentrations

in Commercial Real Estate Lending.”

The

guidance defines CRE loans as exposures secured by raw land, land development and

construction loans (including 1-4

family residential construction loans), multi-family property,

and non-farm non-residential property,

where the primary or a

significant source of repayment is derived from rental income associated

with the property (that is, loans for which 50% or

more of the source of repayment comes from third party,

non-affiliated, rental income) or the proceeds of the sale,

refinancing, or permanent financing of the property.

Loans to REITs

and unsecured loans to developers that closely

correlate to the inherent risks in CRE markets are also CRE loans.

Loans on owner occupied commercial real estate are

generally excluded from CRE for purposes of this guidance.

Excluding owner occupied commercial real estate, we had 39.6% of our loan por

tfolio in CRE loans at year-end 2023

compared to 40.4% and 42.6% at year-end 2022 and 2021, respectively.

The banking regulators continue to give CRE

lending scrutiny and require banks with higher levels of CRE loans to implement improved

underwriting, internal controls,

risk management policies and portfolio stress testing, as well as higher levels of allowances

for possible losses and capital

levels as a result of CRE lending growth and exposures.

Increases in interest rates beginning in March 2022 may adversely

affect the assumptions and performance of CRE, and the ability of borrowers

to refinance on terms that CRE borrowers and

their projects can support.

Lower demand for CRE and fewer CRE purchase and sale transactions, and reduced availability

of, and higher interest rates and costs for, CRE loans could adversely

affect CRE values and liquidity,

our CRE loans and

sales of OREO, and therefore our earnings and financial condition, including our capital and

liquidity.

Our future success is dependent on our ability

to compete effectively in highly competitive markets.

The East Alabama banking markets which we operate are highly competitive and

our future growth and success will

depend on our ability to compete effectively in these markets.

Nineteen banks, including JP Morgan Chase, Wells

Fargo,

Truist, PNC, Regions, Valley

National and SouthState, have offices in Lee County.

Eleven of these banks are

headquartered outside of Alabama.

We compete

for loans, deposits and other financial services with other local, regional

and national commercial banks, thrifts, credit unions, mortgage lenders, and securities

and insurance brokerage firms.

Lenders operating nationwide over the internet are growing rapidly.

Many of our competitors offer products and services

different from us, and have substantially greater resources, name recognition

and market presence than we do, which

benefits them in attracting business.

In addition, larger competitors may be able to price loans and deposits

aggressively than we are able to and have broader and more diverse customer and

geographic bases to draw upon.

Out of

state banks may branch into our markets.

Fintech and other non-bank competitors also compete for our customers,

and may

partner with other banks and/or seek to enter the payments system.

The failures of other banks with offices in our markets

could also lead to the entrance of new, stronger

competitors in our markets.

Our success depends on local economic conditions.

Our success depends on the general economic conditions in the geographic

markets we serve in Alabama.

The local

economic conditions in our markets have a significant effect on our commercial,

real estate and construction loans, the

ability of borrowers to repay these loans and the value of the collateral securing these loans.

Adverse changes in the

economic conditions of the Southeastern United States in general, or in one or more of our

local markets, including the

effects of higher market interest rates and inflation, supply chain disruptions,

changes in customer behaviors and in the

workforce and demand for space since the COVID-19 pandemic, and the timing and

magnitude of future inflation and

interest rates, could negatively affect our results of operations and our profitability.

Our local economy is also affected by

the growth of automobile manufacturing and related suppliers located

in our markets and nearby.

Auto sales and housing

sales are cyclical and generally are affected adversely by higher interest rates.

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Attractive acquisition opportunities may not be available to us in the

future.

While we seek continued organic growth, including loan growth,

we also may consider the acquisition of other businesses.

We expect that other banking

and financial companies, many of which have significantly greater resources,

will compete

with us to acquire financial services businesses.

This competition could increase prices for potential acquisitions that we

believe are attractive.

Also, acquisitions are subject to various regulatory approvals.

If we fail to receive the appropriate

regulatory approvals, we will not be able to consummate an acquisition that

we believe is in our best interests, and

regulatory approvals could contain conditions that reduce the anticipated benefits of any transaction.

Among other things,

our regulators consider our capital, liquidity,

profitability, regulatory

compliance and levels of goodwill and intangibles

when considering acquisition and expansion proposals.

Any acquisition could be dilutive to our earnings and shareholders’

equity per share of our common stock.

The regulatory agencies are carefully scrutinizing financial institution

mergers, and

the merger application process has lengthened.

Future acquisitions and expansion activities may disrupt

our business, dilute shareholder value

and adversely affect our

operating results and financial condition.

We regularly evaluate

potential acquisitions and expansion opportunities, including new branches and

other offices.

To the

extent that we grow through acquisitions, we cannot assure you that we

will be able to adequately or profitably manage this

growth.

Acquiring other banks, branches, or businesses, as well as other geographic and product

expansion activities,

involve various risks including:

●

risks of unknown or contingent liabilities, and potential asset quality issues;

●

unanticipated costs and delays;

●

risks that acquired new businesses will not perform consistent with our growth and profitability

expectations;

●

risks of entering new markets or product areas where we have limited experience;

●

risks that growth will strain our infrastructure, staff, internal controls

and management, which may require

additional personnel, time and expenditures;

●

difficulties, expenses and delays of integrating the operations and personnel of acquired

institutions;

●

potential disruptions to our business;

●

possible loss of key employees and customers of acquired institutions;

●

potential short-term decreases in profitability; and

●

diversion of our management’s time and

attention from our existing operations and business.

Technological

changes affect our business, and we may have fewer resources

than many competitors to invest in

technological improvements.

The financial services industry is undergoing rapid technological changes

with frequent introductions of new technology

driven products and services and growing demands for mobile and user-based

banking applications. In addition to allowing

us to analyze our customers better, the effective

use of technology may increase efficiency and may enable

financial

institutions to reduce costs, risks associated with fraud and compliance

with anti-money laundering and other laws, and

various operational risks.

Largely unregulated “fintech” businesses have increased their

participation in the lending and

payments businesses, and have increased competition in these businesses. Our future

success will depend, in part, upon our

ability to use technology to provide products and services that meet our customers’ preferences

and create additional

efficiencies in operations, while avoiding cyber-attacks

and disruptions, data breaches and anti-money laundering and other

potential violations of law. The

COVID-19 pandemic and increased remote work has accelerated electronic

banking

activity and the need for increased operational efficiencies and data security.

may need to make significant additional

capital investments in technology,

including cyber and data security,

and we may not be able to effectively implement new

technology-driven products and services, or such technology

may prove less effective than anticipated. Many larger

competitors have substantially greater resources to invest in technological improvements

and, increasingly,

non-banking

firms are using technology to compete with traditional lenders for loans, payments,

and other banking services.

As a result,

our competition from service providers not located in our markets has increased.

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Operational risks are inherent

in our businesses.

Operational risks and losses can result from internal and external fraud; gaps or

weaknesses in our risk management or

internal audit procedures; errors by employees or third parties, including our vendors,

failures to document transactions

properly or obtain proper authorizations; failure to comply with applicable regulatory requirements

in the various

jurisdictions where we do business or have customers; failures in our estimates models

that rely on; equipment failures,

including those caused by natural disasters, or by electrical, telecommunications

or other essential utility outages; business

continuity and data security system failures, including those caused by computer viruses, cyberattacks,

unforeseen

problems encountered while implementing major new computer systems or,

failures to timely and properly upgrade and

patch existing systems or inadequate access to data or poor response capabilities in light of

such business continuity and

data security system failures; or the inadequacy or failure of systems and controls,

including those of our vendors or

counterparties.

The COVID-19 pandemic presented operational challenges to maintaining

continuity of operations of

customer services while protecting our employees’ and customers’ safety and

similar situations may occur in the future.

addition, we face certain risks inherent in the ownership and operation of our bank premises

and other real-estate, including

liability for accidents on our properties. Although we have implemented risk controls

and loss mitigation actions, and

substantial resources are devoted to developing efficient procedures,

identifying and rectifying weaknesses in existing

procedures and training staff and potential environmental risks, it is not possible

to be certain that such actions have been or

will be effective in controlling these various operational risks that evolve

continuously.

Potential gaps in our risk management policies and internal audit procedures

may leave us exposed to unidentified or

unanticipated risk, which could negatively affect our business.

Our enterprise risk management and internal audit program is designed to

mitigate material risks and losses to us. We

have

developed and continue to develop risk management and internal audit policies and

procedures to reflect the ongoing

review of our risks and expect to continue to do so in the future. Nonetheless, our policies

and procedures may not be

comprehensive and may not identify timely every risk to which we are exposed, and

our internal audit process may fail to

detect such weaknesses or deficiencies timely in our risk management framework. Many

of our risk management models

and estimates use observed historical market behavior to model or project

potential future exposure.

The models used by

our business, including the new CECL models, are based on assumptions and projections.

These models may not operate

properly, or our inputs and assumptions

may be inaccurate, or changes in economic and market conditions, customer

behaviors or regulations may adversely affect the accuracy

or usefulness of the models.

As a result, these methods may not

fully or timely predict future exposures, which can be significantly greater and/or faster

than historically.

Other risk

management methods depend upon the evaluation of information regarding

markets, clients, or other matters that are

publicly available or otherwise accessible to us. This information

may not always be accurate, complete, up-to-date or

properly evaluated. Furthermore, there can be no assurance that we can effectively

review and monitor all risks or that all of

our employees will closely follow our risk management policies and procedures,

nor can there be any assurance that our

risk management policies and procedures will enable us to accurately identify all

risks and limit our exposures based on our

assessments.

In addition, we may have to implement more extensive and perhaps different

risk management policies and procedures as

our regulation changes.

For example, the Federal Reserve and the federal bank regulators issued

Principles for Climate-

Related Risk for Large Financial Institutions

(October 14, 2023).

The bank regulators’ guidance applies to banks with over

$100 billion in assets.

The SEC adopted a climate risk

rule on March 6, to require more disclosure on climate risks, also.

All of these could adversely affect our costs, and our financial condition and results of

operations.

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Any failure to protect

the confidentiality of customer information could adversely affect our reputation

and have a material

adverse effect on our business, financial condition and results

of operations

Various

laws enforced by the bank regulators and other agencies protect the privacy and security of

customers’ non-public

personal information. Many of our employees have access to, and routinely process

personal information of clients through

a variety of media, including information technology systems.

Our internal processes, policies and controls are designed to

protect the confidentiality of client information we hold and that is accessible to us and our

employees. It is possible that an

employee could, intentionally or unintentionally,

disclose or misappropriate confidential client information or our data

could be the subject of a cybersecurity attack.

Such personal data could also be compromised via intrusions into our

systems or those of our service providers or other persons we do business with such as credit

bureaus, data processors and

merchants who accept credit or debit cards for payment. If we fail to maintain adequate

internal controls, or if our

employees fail to comply with our policies and procedures, misappropriation

or inappropriate disclosure or misuse of client

information could occur. Such

internal control inadequacies or non-compliance could materially damage our reputation,

lead to remediation costs and civil or criminal penalties.

These could have a material adverse effect on our business,

financial condition and results of operations.

See Item 1C. of this report for more information about cybersecurity and our

management and strategies.

Our information systems may experience interruptions and security brea

ches.

We rely heavily on communications

and information systems, including those provided by third-party service

providers, to

conduct our business.

Any failure, interruption, or security breach of these systems could result in failures or

disruptions

which could affect our customers’ privacy and our customer relationships,

generally.

Our business continuity plans,

including those of our service providers, for back-up and service restoration, may

not be effective in the case of widespread

outages due to severe weather, natural disasters, pandemics,

or power, communications and other failures.

See Item 1C. of

this report for more information about cybersecurity and our management and strategies.

Our systems and networks, as well as those of our third-party service providers,

are subject to security risks and could be

susceptible to disruption through cyber-attacks, such as denial of service attacks, hacking,

terrorist activities, or identity

theft.

Cybercrime risks have increased as electronic and mobile banking activities increased

as a result of the COVID-19

pandemic, and may increase as a result of the Russia invasion of Ukraine and tensions

with mainland China and other

countries.

Other financial service institutions and their service providers have reported

material security breaches in their

websites or other systems, some of which have involved sophisticated and targeted

attacks, including use of stolen access

credentials, malware, ransomware, phishing and distributed denial-of

-service attacks, among other means.

Such cyber-

attacks may also seek to disrupt the operations of public companies or their business partners,

effect unauthorized fund

transfers, obtain unauthorized access to confidential information, destroy data,

disable or degrade service, or sabotage

systems.

Hacking and identity theft risks, in particular, could

cause serious reputational harm.

Despite our cybersecurity policies and procedures and our Board

of Directors and management’s efforts to

monitor and

ensure the integrity of the systems we and our third-party service providers

use, we may not be able to anticipate the rapidly

evolving security threats, nor may we be able to implement preventive measures effective

against all such threats.

The

techniques used by cyber criminals change frequently,

may not be recognized until launched and can originate from a wide

variety of sources, including external service providers, organized

crime affiliates, terrorist organizations or hostile

foreign

governments.

These risks may increase in the future as the use of mobile banking and other

internet electronic banking

continues to grow.

Security breaches or failures may have serious adverse financial and other consequences,

including significant legal and

remediation costs, disruptions to operations, misappropriation of confidential information,

damage to systems operated by

us or our third-party service providers, as well as damages to our customers and our counterparties.

In addition, these events

could damage our reputation, result in a loss of customer business, subject us to additional

regulatory scrutiny, or expose

to civil litigation and possible financial liability,

any of which could have a material adverse effect on our

financial

condition and results of operations.

In July 2023, the SEC adopted rules, effective September 5, 2023,

that

require reporting companies to disclose material

cybersecurity incidents they experience on SEC Form 8-K within four business days,

nature, scope, and timing of the

incident, and the material impact or reasonably likely material impact on the registrant,

including its financial condition and

results of operations.

As a smaller reporting company, the Company

has to comply with these Form 8-K reporting

requirements beginning June 15, 2024.

Annually, reporting companies are required

to disclose

material information

regarding their cybersecurity risk management, strategy,

and governance, beginning for years ending on or after December

15, 2023.

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We may be unable

to attract and retain key people to support our business.

Our success depends, in large part, on our ability to attract and retain key people.

We compete

with other financial services

companies for people primarily on the basis of compensation and benefits, support

services and financial position. Intense

competition exists for key employees with demonstrated ability,

and we may be unable to hire or retain such employees.

Effective succession planning is also important to our long-term

success. The unexpected loss of services of one or more of

our key persons and failure to ensure effective transfer of knowledge and

smooth transitions involving such persons could

have a material adverse effect on our business due to loss of their skills,

knowledge of our business, their years of industry

experience and the potential difficulty of promptly finding qualified

replacement employees.

Proposed rules implementing the executive compensation provisions of the Dodd

-Frank Act may limit the type and

structure of compensation arrangements and prohibit the payment of “excessive compensation”

to our executives. These

restrictions could negatively affect our ability to compete with other companies

in recruiting and retaining key personnel.

Severe weather and natural disasters, including

as a result of climate change, pandemics, epidemics, acts

of war or

terrorism or other external events could have significant

effects on our business.

Severe weather and natural disasters, including hurricanes, tornados,

drought and floods, epidemics and pandemics, acts of

war or terrorism or other external events could have a significant effect on our ability to conduct

business.

Such events

could affect the stability of our deposit base, impair the ability of borrowers to

repay outstanding loans, impair the value of

collateral securing loans, cause significant property damage, result in loss of revenue

and/or cause us to incur additional

expenses.

Although management has established disaster recovery and business continuity

policies and procedures, the

occurrence of any such event could have a material adverse effect on our

business, which, in turn, could have a material

adverse effect on our financial condition and results of operations.

The COVID-19 pandemic, trade wars, tariffs, sanctions and similar

events and disputes, domestic and international, have

adversely affected, and may continue to adversely affect economic

activity globally, nationally

and locally.

Market interest

rates have changed significantly and suddenly.

The Federal Reserve’s target

federal funds rates declined to 0-0.25% in

March 2020, where these remained until March 17 2022.

The Federal Reserve increased the target federal funds rates 11

from March 17, 2022

through July 27, 2023 to 5.25-5.50% due to inflation.

As of March 6, 2023, this range remained at

5.25-5.50% and inflation remains above the Federal Reserve’s

target rate of 2%.

Such events also may adversely affect

business and consumer confidence, generally.

We and our customers,

and our respective suppliers, vendors and processors

may be adversely affected by rising costs and shortages of needed

equipment and supplies and tight labor markets.

The

continuation or worsening of these conditions may adversely affect our

profitability, growth asset quality

and financial

condition.

Financial Risks

Our ability to realize our deferred

tax assets may be reduced in the future

if our estimates of future taxable income from

our operations and tax planning strategies do not support this amount, and the amount

of net operating loss carry-forwards

realizable for income tax purposes may be reduced

under Section 382 of the Internal Revenue Code by sales of our capital

securities.

We are allowed to carry

-back losses for two years for Federal income tax purposes.

As of December 31, 2023, we had a

net deferred tax asset of $10.3 million compared to $13.8 million one year earlier.

These and future deferred tax assets may

be further reduced in the

future if our estimates of future taxable income from our operations and tax planning

strategies do

not support the amount of the deferred tax asset.

The amount of net operating loss carry-forwards realizable for income tax

purposes potentially could be further reduced under Section 382

of the Internal Revenue Code by a significant offering

and/or other sales of our capital securities.

Current bank capital rules also reduce the regulatory capital benefits of deferred

tax assets.

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Our cost of funds may increase as a result

of general economic conditions, interest rates, inflation

and changes in customer

behaviors and competitive pressures.

Our costs of funds have increased as a result of general economic conditions,

increasing interest rates and competitive

pressures, and inflation, and anticipated future changes by the Federal Reserve to reduce

inflation.

Traditionally,

we have

obtained funds principally through local deposits and borrowings from other institutional

lenders such as the FHLB-

Atlanta, which we believe are a cheaper and more stable source of funds than borrowings,

generally.

Increases in interest

rates have caused consumers to shift their funds to more interest-bearing instruments

and to increase the competition for

and costs of deposits.

If customers move money out of bank deposits and into other investment assets

or from transaction

deposits to higher interest-bearing time deposits, we could lose a relatively low cost

source of funds, increasing our funding

costs and potentially reducing our net interest income and net income. Additionally,

any such loss of funds could result in

lower loan originations and growth, which could materially and adversely affect

our results of operations and financial

condition.

See “Supervision and Regulation – Fiscal and Monetary Policy.”

Our profitability and liquidity may be affected

by changes in interest rates and interest

rate levels, the shape of the yield

curve and economic conditions.

Our profitability depends upon net interest income, which is the difference between

interest earned on interest-earning

assets, such as loans and investments, and interest expense on interest-bearing liabilities,

such as deposits and borrowings.

Our income is primarily driven by the spread between these rates. Net interest income

will be adversely affected if market

interest rates and the interest we pay on deposits and borrowings increases faster than the

interest earned on loans and

investments.

Interest rates, and consequently our results of operations, are affected

by general economic conditions

(national, international and local) and fiscal and monetary policies, as well as expectations

of interest rate changes, fiscal

and monetary policies and the shape of the yield curve.

As a result, a steeper yield curve, meaning long-term interest rates

are significantly higher than short-term interest rates, would provide

the Bank with a better opportunity to increase net

interest income.

Conversely, a flattening yield curve

could further pressure our net interest margin as our cost of funds

increases relative to the spread we can earn on our assets.

The yield curve continues to remain inverted, and this results in a

lower spread between our costs of funds and our interest income.

In addition, net interest income could be affected by

asymmetrical changes in the different interest rate indexes, given that

not all of our assets or liabilities are priced with the

same index.

Higher market interest rates and continuing run-off of maturing securities

held by the Federal Reserve in

furtherance of its quantitative tightening policy to reduce inflation generally reduce economic

activity and may reduce loan

demand and growth.

The production of mortgages and other loans and the value of collateral securing our

loans are dependent on demand within

the markets we serve, as well as interest rates.

Lower interest rates typically increase mortgage originations, decrease MSR

values and promote economic growth.

Increases in market interest rates tend to decrease mortgage originations, increase

MSR values, decrease the value and liquidity of collateral securing loans, and potentially

increase net interest spread

depending upon the yield curve and the magnitude and duration of interest rate

increase, and constrain economic growth.

Increases in market interest rates have also caused unrealized losses in our securities portfolio

as our available for sale

investments are carried at fair value and market prices have declined as market interest

rates increase.

Although these

unrealized losses do not adversely affect our regulatory capital, these do

reduce our reported GAAP tangible stockholders’

equity.

Sales of securities with unrealized losses would result in realized losses for

GAAP,

regulatory capital and tax

purposes.

Increases in interest rates may also change depositor behaviors as customers

seek higher yielding deposits.

This

may adversely affect our costs of funds, growth, net interest

income and net income, and may also adversely affect our

liquidity.

Liquidity risks could affect operations and jeopardize

our financial condition.

The COVID-19 pandemic generally has increased our deposits and at banks, generally,

while reducing the interest rates

earned on loans and securities.

Such excess liquidity and the resulting balance sheet growth requires capital support

and

reduced returns on assets and equity.

Inflation and tightening monetary policies beginning in early 2022 have increased

interest spreads, but may change the mix and costs of our deposits over time.

The growth in deposits exceeded our loan

growth and the difference was invested in high-quality,

marketable U.S. government and government agency securities,

including agency mortgage-backed securities.

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Liquidity is essential to our business.

An inability to raise funds through deposits, borrowings, proceeds from loan

repayments or sales proceeds from maturing loans and securities, and other sources

could have a negative effect on our

liquidity.

Our funding sources include deposits (primarily core deposits), federal funds purchased,

securities sold under

repurchase agreements, and short-

and long-term debt.

We maintain a portfolio

of marketable high-quality securities that

can be used as a source of liquidity.

As market interest rates have risen, however,

we have experienced unrealized losses

on such securities, which would become realized losses upon the sale of such securities,

and such sales at a loss would

reduce our net income and our regulatory capital.

We are also

members of the FHLB-Atlanta and the Federal Reserve Bank of Atlanta, and we can obtain advances

collateralized with eligible assets, and maintain uncommitted federal funds lines of credit

with other banks.

On March 12,

2023, the Federal Reserve established a new Bank Term

Funding Program (“BTFP”), which offers loans of up to one

year

to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S.

Treasuries, agency

debt and mortgage-backed securities, and other qualifying assets as collateral

valued at par. The BTFP ended

March 11,

2024 and we have not used this program. In addition, the discount window

will apply the same margins used for the

securities eligible for the BTFP,

further increasing the value of investment securities at the discount window.

Other sources of liquidity available to the Company or the Bank, if needed, include

our ability to acquire additional non-

core deposits.

We may be able, depending

upon market conditions, to borrow money or issue and sell debt and preferred or

common securities in public or private transactions.

Our access to funding sources in amounts adequate to finance or

capitalize our activities on terms which are acceptable to us could be impaired by factors

that affect us specifically,

or the

financial services industry, the

economy and market interest rates and fiscal and monetary policies.

General conditions that

are not specific to us, such as disruptions in the financial markets, failures of other bank, such as

Silicon Valley

Bank,

Signature Bank and First Republic Bank in 2023, or negative views and expectations

about the prospects for the financial

services industry could adversely affect us.

Changes in accounting and tax rules applicable to banks could adversely

affect our financial conditions and results of

operations.

From time to time, the FASB

and the SEC change the financial accounting and reporting standards that govern the

preparation of our financial statements.

These changes can be difficult to predict and can materially impact how

we record

and report our financial condition and results of operations.

In some cases, we could be required to apply a new or revised

standard retroactively, resulting

in us restating prior period financial statements

We may need

to raise additional capital in the future,

but that capital may not be available when it is needed or on

favorable terms.

We anticipate that our current

capital resources will satisfy our capital requirements for the foreseeable

future under

currently effective rules.

We may,

however, need to raise additional capital to support

our growth or currently

unanticipated losses, or to meet the needs of our communities, resulting from failures or

cutbacks by our competitors.

Our

ability to raise additional capital, if needed, will depend, among other things, on conditions

in the capital markets at that

time, which are limited by events outside our control, and on our financial performance.

If we cannot raise additional

capital on acceptable terms when needed, our ability to further expand our operations

through internal growth and

acquisitions could be limited.

Our associates may take excessive risks which could negatively affect our financial

condition and business.

Banks are in the business of accepting certain risks.

Our executive officers and other members of management,

sales

intermediaries, investment professionals, product managers, and other

associates, make decisions and choices that involve

exposing us to risk. We endeavor,

in the design and implementation of our compensation programs and practices, to avoid

giving our associates incentives to take excessive risks; however,

associates may nonetheless take such risks.

Similarly,

although we employ controls and procedures designed to prevent misconduct,

to monitor associates’ business decisions and

prevent them from taking excessive risks, these controls and procedures

may not be effective. If our associates take

excessive risks, risks to our reputation, financial condition and business operations

could be materially and adversely

affected.

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Our ability to continue to pay dividends to shareholders

and repurchase stock

in the future is subject to our profitability,

capital, liquidity and regulatory requirements

and these limitations may prevent or limit

future dividends.

Cash available to pay dividends to our shareholders is derived primarily from dividends paid

to the Company by the Bank.

The ability of the Bank to pay dividends, as well as our ability to pay dividends to our shareholders,

will continue to be

subject to and limited by laws limiting dividend payments by the Bank, the results of operations

of our subsidiaries and our

need to maintain appropriate liquidity and capital at all levels of our business consistent

with regulatory requirements and

the needs of our businesses.

We can only pay dividends,

repurchase stock and pay discretionary bonuses, if our capital

conservation buffer exceeds 2.5% and from our eligible retained

income over the last four calendar quarters.

Although we

believe our securities portfolio repositioning in December 2023 improved our

balance sheet and reduced our interest rate

risks, the losses on such securities sales reduced our eligible retained income available

for dividends, share repurchases and

discretionary bonuses.

See “Supervision and Regulation - Payment of Dividends and Repurchases of

Capital Instruments.”

The Federal Reserve expects bank holding companies to inform and consult

with Federal Reserve supervisory staff

sufficiently in advance of (i) declaring and paying a dividend that could raise

safety and soundness concerns, such as

declaring and paying a dividend that exceeds earnings for the period

for which the dividend is being paid); (ii) redeeming or

repurchasing regulatory capital instruments when the bank holding company is

experiencing financial weaknesses; or (iii)

redeeming or repurchasing common stock or perpetual preferred stock that

would result in a net reduction as of the end of a

quarter in the amount of such equity instruments outstanding compared

with the beginning of the quarter in which the

redemption or repurchase occurred.

Further, the Company is also required to

maintain sufficient capital, liquidity and resources to serve as a source of

managerial and financial strength to the Bank, which may limit its capacity to pay dividends

on Company common stock.

The Federal Reserve may require the Company to commit resources to the Bank, even

where it is not otherwise in the

interests of the Company or its shareholders or creditors.

A limited trading market exists for our common shares,

which could result in price volatility.

Your

ability to sell or purchase common shares depends upon the existence of an active trading

market for our common

stock.

Although our common stock is quoted on the Nasdaq Global Market under the trading

symbol “AUBN,” our trading

volume has been limited historically.

As a result, you may be unable to sell or purchase shares of our common stock at the

volume, price and time that you desire.

Additionally, whether

the purchase or sales prices of our common stock reflects a

reasonable valuation of our common stock also is affected by limited trading

market, and thus the price you receive for a

thinly-traded stock, such as our common stock, may not reflect its true or intrinsic

value.

The limited trading market for

our common stock may cause fluctuations in the market value of our common stock to be exaggerated,

leading to price

volatility in excess of that which would occur in a more active trading market.

Legal and Regulatory Risks

The Company is an entity separate and distinct from

the Bank.

The Company is an entity separate and distinct from the Bank. Company transactions

with the Bank are limited by Sections

23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.

We depend

upon the Bank’s earnings and

dividends, which are limited by law and regulatory policies and actions, for cash to pay the Company’s

corporate

obligations, and to pay dividends to our shareholders.

If the Bank’s ability to pay dividends to the Company

was

terminated or limited, the Company’s liquidity and

financial condition could be materially and adversely affected.

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Legislative and regulatory changes

The Biden Administration and its appointees to the various government agencies, including

the bank regulators, CFPB and

SEC,

have proposed, and continue to propose changes to bank regulation, SEC rules

and corporate tax changes that could

have an adverse effect on our results of operations and financial condition.

The bank regulators, the CFPB and the SEC have actively developed a broad

range of new and changed rules over the last

several years , many of which are complex and lengthy,

such as the new CRA regulations and various SEC rules, including

the cybersecurity rule adopted in September

2023 and climate change rules adopted on March 6, 2024.

Some rules, such

as the SEC share repurchase modernization rules, have been struck down by the courts

and have been withdrawn, creating

more compliance uncertainty during the pendency of the litigation.

Ten states attorney

generals immediately challenged the

new climate change rules, and the Sierra Club is reported to be considering action against

the SEC rules because it was

scaled back from the original proposal.

Compliance with the volume and complexity of these rule changes is costly and imposes

material time and personnel

burdens on financial services companies, especially on smaller companies, such

as the Company.

Increasing litigation on

regulatory rules and whether these exceed the agencies’ statutory authority or have

been improperly adopted has also

created further uncertainty and risks as to the final timing, content and scope of new rules,

and business changes needed to

be made to comply with the effective or compliance dates of the new or changed rules.

For example, the SEC’s share

repurchase disclosure modernization amendments were adopted in May 2023,

with a compliance date for calendar year

issuers beginning with their 2023 annual Form 10-K report.

The SEC postponed the rule on November 22, 2023, following

a court ruling ordering the SEC to correct the defects in the rule by November 30,

2023.

In December 2023, the court

vacated the rule due to inaction by the SEC, and the SEC reverted on February 9, 2024

to its pre-existing rules.

We are

subject to extensive regulation that could limit or restrict

our activities and adversely affect our earnings.

We and our subsidiaries are

regulated by several regulators, including the Federal Reserve, the Alabama Superintendent,

the SEC and the FDIC.

Although not regulated or supervised by the CFPB, we are subject to the regulations and

interpretations of the CFPB and the Federal Reserve’s

supervision of our compliance with such regulations and

pronouncements.

Our success is affected by state and federal laws and regulations affecting

banks and bank holding

companies, and the securities markets, and our costs of compliance could adversely affect

our earnings.

Banking

regulations are primarily intended to protect depositors, and the FDIC’s

DIF, not shareholders.

The financial services

industry also is subject to frequent legislative and regulatory changes and proposed

changes.

In addition, the interpretations

of regulations by regulators may change and statutes may be enacted with retroactive impact.

From time to time, regulators

raise issues during examinations of us which, if not determined satisfactorily,

could have a material adverse effect on us.

Compliance with applicable laws and regulations is time consuming and costly and

may affect our profitability.

Our

regulators could have a material adverse effect on financial services

regulation, generally.

Litigation and regulatory actions could harm

our reputation and adversely affect our results

of operations and financial

condition.

A substantial legal liability or a significant regulatory action against us, as well as regulatory inquiries

or investigations,

could harm our reputation, result in material fines or penalties, result in significant

legal and other costs, divert management

resources away from our business, and otherwise have a material adverse effect

on our ability to expand on our existing

business, financial condition and results of operations. Even if we ultimately

prevail in litigation, regulatory investigation or

action, our ability to attract new customers, retain our current customers and recruit and retain employees

could be

materially and adversely affected.

Regulatory inquiries and litigation may also adversely affect the prices or volatility

our securities specifically, or the

securities of our industry,

generally.

As a participating lender in the PPP,

the Bank is subject to additional risks of litigation from the

Bank’s

customers or other

parties regarding

the Bank’s

processing of loans for the PPP and risks of potential SBA

or bank regulatory claims.

The Bank participated as a lender in the PPP and made a total of $56.7 million of PPP loans in 2020

and 2021, generally to

support existing customers in the Bank’s

markets.

All PPP loans made by the Bank have been forgiven by the SBA, except

for one credit where the borrower is voluntarily repaying the loan.

Since the beginning of the PPP,

various banks have

been subject to litigation regarding the processes and procedures used in processing applications

for the PPP,

and greater

governmental attention is directed at preventing fraud.

We may be exposed to

similar litigation risks, from both customers

and non-customers that approached the Bank regarding PPP loans that we extended.

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The SBA, the Department of Justice and the bank regulators are investigating

various PPP lenders and borrowers with

respect to potential fraud or improper activities under the PPP loan programs.

Although the SBA has not indicated any

issues with the Bank’s participation

in the PPP program and honored all PPP forgiveness requests, the

Bank could have

potential liability if the SBA later determines deficiencies in the manner in which PPP

loans were originated, funded or

serviced by the Bank, such as an issue with the eligibility of a borrower to receive

a PPP loan, or its forgiveness of a PPP

properly, including those related

to the ambiguities in the laws, rules and guidance regarding the PPP’s

operation.

The Bank is unaware of any such investigation or claims. If any such claims are

made against the Bank and are not resolved

favorably to the Bank, it may result in financial liability or adversely affect

our reputation.

Any financial liability, litigation

costs or reputational damage caused by PPP related litigation could have a material adverse

effect on our business, financial

condition and results of operations.

Similar issues may also result in the denial of forgiveness of PPP

loans, which could

expose us to potential borrower bankruptcies and potential losses and additional costs.

We are

required to maintain

capital to meet regulatory requirements,

and if we fail to maintain sufficient capital, our

financial condition, liquidity and results of operations

would be adversely affected.

We and the Bank must

meet regulatory capital requirements and maintain sufficient

liquidity, including liquidity

at the

Company, as well as the Bank.

If we fail to meet these capital and other regulatory requirements, including

more rigorous

requirements arising from our regulators’ implementation of Basel III,

our financial condition, liquidity and results of

operations would be materially and adversely affected.

Our failure to remain “well capitalized” and “well managed”,

including meeting the Basel III capital conservation buffers, for

bank regulatory purposes, could affect customer

confidence, our ability to grow, our

costs of funds and FDIC insurance, our ability to raise brokered deposits, our

ability to

pay dividends on our common stock and our ability to make acquisitions, and we

may no longer meet the requirements for

becoming a financial holding company.

These could also affect our ability to use discretionary bonuses to

attract and retain

quality personnel.

See

“Supervision and Regulation—Basel III Capital Rules.”

Although we currently have capital ratios

that exceed all these minimum levels and a strategic plan to maintain these levels, we or the

Bank may be unable to

continue to satisfy the capital adequacy requirements and/or maintain our liquidity for various

reasons, which may include:

●

losses and/or increases in the Bank’s credit risk assets

and expected losses resulting from the deterioration in the

creditworthiness of borrowers and the issuers of equity and debt securities;

●

difficulty in refinancing or issuing instruments upon redemption or

at maturity of such instruments to raise capital

under acceptable terms and conditions;

●

declines in the value of our securities portfolios or sales of securities for losses;

●

revisions to the regulations or their application by our regulators that increase our capital requirements;

●

reduced total earnings on our assets will reduce our internal generation of capital available

to support our balance

sheet growth;

●

reductions in the value of our MSRs and DTAs;

and other adverse developments; and

●

unexpected growth and an inability to increase capital timely.

A failure to remain “well capitalized,” for bank regulatory purposes, including meeting the

Basel III Capital Rule’s

conservation buffer, could adversely affect

customer confidence, and our:

●

ability to grow;

●

the costs of and availability of funds;

●

FDIC deposit insurance premiums;

●

ability to raise or replace brokered deposits;

●

ability to pay or increase dividends on our capital stock.

●

Ability to repurchase our common stock

●

ability to make discretionary bonuses to attract and retain quality personnel;

●

ability to make acquisitions or engage in new activities;

●

flexibility if we become subject to prompt corrective action restrictions; and

●

ability to make payments of principal and interest on any of our capital instruments

that may be then outstanding.

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The Federal Reserve may require

us to commit capital resources

to support the Bank.

As a matter of policy, the Federal

Reserve expects a bank holding company to act as a source of financial and managerial

strength to a subsidiary bank and to commit resources to support such subsidiary bank. The

Federal Reserve may require a

bank holding company to make capital injections into a troubled subsidiary bank. In addition,

the Dodd-Frank Act amended

the FDI Act to require that all companies that control a FDIC-insured depository institution

serve as a source of financial

strength to their depository institution subsidiaries. Under these requirements,

we could be required to provide financial

assistance to the Bank should it experience financial distress, even if further investment

was not otherwise warranted. See

“Supervision and Regulation.”

Our operations are subject to risk of loss from

unfavorable fiscal, monetary and political developments in the

U.S.

Our businesses and earnings are affected by the fiscal, monetary and other policies

and actions of various U.S.

governmental and regulatory authorities. Changes in these are beyond our control

and are difficult to predict and,

consequently, changes in these

policies could have negative effects on our activities and results of operations.

Failures of

the executive and legislative branches to agree on spending plans and budgets previously

have led to Federal government

shutdowns, which may adversely affect the U.S. economy.

Additionally, any prolonged

government shutdown may inhibit

our ability to evaluate the economy, generally,

and affect government workers who are not paid

during such events, and

where the absence of government services and data could adversely affect consumer

and business sentiment, our local

economy and our customers and therefore our business.

Litigation and regulatory investigations are

increasingly common in our businesses and may result

in significant financial

losses and/or harm to our reputation.

We face risks of litigation

and regulatory investigations and actions in the ordinary course of operating our

businesses,

including the risk of class action lawsuits. Plaintiffs in class action and

other lawsuits against us may seek very large and/or

indeterminate amounts, including punitive and treble damages. Due to the vagaries of litigation,

the ultimate outcome of

litigation and the amount or range of potential loss at particular points in time may be difficult

to ascertain. We

do not have

any material pending litigation or regulatory matters affecting

us.

Failures to comply with the fair lending laws, CFPB regulations

or the Community Reinvestment Act, or CRA, could

adversely affect us.

The Bank is subject to, among other things, the provisions of the Equal Credit Opportunity

Act, or ECOA, and the Fair

Housing Act, both of which prohibit discrimination based on race or

color, religion, national origin, sex and familial status

in any aspect of a consumer, commercial credit or residential

real estate transaction. The DOJ and the federal bank

regulatory agencies have issued an Interagency Policy Statement on Discrimination

in Lending have provided guidance to

financial institutions to evaluate whether discrimination exists and how the agencies

will respond to lending discrimination,

and what steps lenders might take to prevent discriminatory lending practices.

Failures to comply with ECOA, the Fair

Housing Act and other fair lending laws and regulations, including CFPB

regulations or interpretations, could subject us to

enforcement actions or litigation, and could have a material adverse effect

on our business financial condition and results of

operations. Our Bank is also subject to the CRA and periodic CRA examinations. The CRA requires

us to serve our entire

communities, including low-

and moderate-income neighborhoods. Our CRA ratings could be

adversely affected by actual

or alleged violations of the fair lending or consumer financial protection laws. The

CRA and fair lending responsibilities

are related and mutually reinforcing.

Even though we have maintained an “satisfactory” CRA rating since

2000, we cannot

predict our future CRA ratings. Violations

of fair lending laws or if our CRA rating falls to less than “satisfactory” could

adversely affect our business, including expansion through branching

or acquisitions.

The Federal Reserve adopted comprehensive revisions to its CRA regulations on October

24, 2023.

The other bank

regulators jointly adopted the new CRA regulations, also, and published the new rule in the

Federal Register on February 1,

2024.

These new rules are first effective for the Bank beginning on January 1, 2026

with data reporting beginning January

1, 2027.

The Bank will be an “intermediate bank” and will be subject to the “retail lending test” and

either the

“intermediate bank community development test,” or if the bank elects, “the community development

financing test.”

are evaluating the new rules but cannot predict their effects on us, but these could

significantly affect our compliance costs

and activities.

See “Supervision and Regulation -

Community Reinvestment Act and Consumer Laws.”

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COVID-19 Risks

The national emergencies related to COVID-19 have been terminated

by the President effective May 11, 2023

and in

February 2024 the Centers for Disease Control likened COVID-19 to the flu, and recommended

continued use of booster

vaccinations.

The medical and direct economic effects of COVID-19 diminished

further in 2023 and are not directly

affecting the Company’s business.

COVID-19 continues to have various indirect effects and risks, the

most important of

which are described herein, including continuing inflation and the Federal Reserve’s

change from accommodative monetary

policy to a tightening monetary policy to fight inflation following significant fiscal

and monetary stimuli provided to reduce

the effects of COVID-19 pandemic on the economy,

as well significant changes resulting from the pandemic, including

supply chain disruptions, a tight labor market, remote work away from the office,

population and business shifts within

regions of the United States, changes in commercial real estate utilization, and shortages of housing

and increases in rents

and housing costs in various areas of the country.

These risks are discussed in this report.

The Company’s assessment of risks related to

COVID-19 and its effects on the Company applicable

during the pandemic

are discussed in the Company‘s Annual Report on Form 10-K filed with the SEC on March

8, 2022 under the caption “Risk

Factors-COVID 19 Risks” and in our Quarterly Reports on Form 10-Qs though

September 30, 2022.

ITEM 1B. UNRESOLVED

STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY

We rely extensively on

various information systems and other electronic resources to operate our business. In addition,

nearly all of our customers, service providers and other business partners on whom

we depend, including the providers of

our online banking, mobile banking and accounting systems, use their own electronic information

systems. Any of these

systems can be compromised, including by employees, customers and other individuals

who are authorized to use them,

and bad actors using sophisticated and a constantly evolving set of software, tools

and strategies to do so.

The threats are

domestic and international and range from small to large, including state

sponsored, terrorist and criminal organizations

with substantial funds, and technical and other resources

As a bank, we and our vendors, service providers and customers may be attractive targets,

and we confront continuous

cybersecurity threats. Insurance to fully cover these risks is unavailable in sufficient

amounts at reasonable costs.

believe the more effective approach is taking active measures to

detect, deter and reduce cybersecurity threats, and be

prepared to address and remediate any breaches and prevent similar breaches in the

future.

See “Risks Related to

Information Security and Business Interruption” section of the Risk Factors included

in Item 1A of this Form 10-K for

additional

information.

Accordingly, we have devoted

significant resources to assessing, identifying and managing risks associated

with

cybersecurity threats, including:

•

Implementing an Information Security Program that establishes policies and

procedures for security

operations and governance;

•

Establishing an IT Steering Committee of the Board that is responsible for security administration,

including

conducting regular assessments of our information systems, existing controls, vulnerabilities

and potential

improvements;

•

Implementing layers of controls and not allowing excessive reliance on any single control;

•

Employing a variety of preventative and detective tools designed to monitor,

block and provide alerts

regarding suspicious activity;

•

Continuously evaluating tools that can detect and help respond to cybersecurity threats

in real-time;

•

Leveraging people, processes and technology to manage and maintain cybersecurity controls;

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•

Maintaining a vendor management program with periodic review processes, and

a third-party risk

management program designed to identify, assess and manage risks associated

with external service providers;

•

Monitoring our systems and related software and programming periodically to update

software and

programing, including updating data protection elements,

and requiring that our service providers also engage

in similar programs that are reasonably designed to deter cybersecurity breaches;

•

Performing initial and ongoing due diligence with respect to our third-party service

providers, including their

cybersecurity practices and safeguards, and service levels based on the risk they pose to the Bank;

•

Engaging third-party cybersecurity consultants, who conduct periodic

penetration testing, vulnerability

assessments and other procedures to identify potential weaknesses in our systems and

processes; and

•

Conducting periodic cybersecurity training for our employees and the Company’s

board of directors.

Our Information Security Program is a key part of our overall risk management system,

which is administered by our IT

Steering Committee and evaluated by our IT Steering Committee and chief risk officer.

The program includes

administrative, technical and physical safeguards to help protect the security and confidentiality

and availability of

customer records and information.

From time-to-time, we have identified cybersecurity threats that require us to

make changes to our processes, equipment

and to implement additional safeguards. While none of these identified threats or incidents

have materially affected us, it is

possible that threats and incidents we identify in the future could have a material adverse effect

on our business strategy,

customer service, data privacy and security,

continuity of service and reputation, and our results of operations and financial

condition.

The Company’s Chief Technology

Officer is responsible for the day-to-day management of

cybersecurity risks we face and

oversees the IT Steering Committee, which is chaired by a director of the Company’s

board. The IT Steering Committee

oversees the information security assessment, development of policies, standards

and procedures, testing, training and

security report processes.

The IT Steering Committee is comprised of directors and officers

with the appropriate expertise

and authority to oversee the Information Security Program.

Our Chief Technology Officer,

along with the information technology department, is accountable for managing our

enterprise information security and delivering our information security program. The

department, as a whole, consists of

information security professionals with varying degrees of education and experience.

The Chief Technology Officer

subject to professional education and certification requirements. In particular,

our Chief Technology

Officer, who is also

designated as our Information Security Officer,

has relevant expertise in the areas of information security and cybersecurity

risk management.

In addition, the Company’s Board,

both as a whole and through its IT Steering Committee is responsible for the oversight

of risk management, including cybersecurity risks. In that role, the Company’s

Board and the IT Steering Committee, with

support from the Company’s management and third

party cybersecurity advisors, are responsible for ensuring that the risk

management processes designed and implemented by management are adequate

and functioning as designed.

The Board

reviews and approves an information security program, vendor management policy (incl

uding third-party service

providers), acceptable use policy,

incident response policy and business continuity planning policy on an annual basis.

All

the aforementioned policies are developed and implemented by Company management.

To carry out their duties,

the Board

receives updates at least quarterly from the Chief Technology

Officer regarding cybersecurity risks and the Company’s

efforts to prevent, detect, mitigate and remediate any cybersecurity incidents.

ITEM 2. DESCRIPTION OF PROPERTY

The Bank conducts its business from its main office and seven full-service

branches.

The Bank also operates a loan

production office in Phenix City,

Alabama.

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The Bank owns its main campus in downtown Auburn, Alabama, which comprises

over 4 acres and includes the newly

constructed AuburnBank Center,

which was completed in May 2022 and had its grand opening in June 2022.

The

AuburnBank Center has approximately 90,000 square feet of space.

The AuburnBank Center includes the Bank’s

main

office, Auburn loan production office, and all of its back-office

operations.

The main office branch offers the full line of

the Bank’s services and has one

ATM.

The Bank’s drive-through facility located

on the main office campus was

constructed in October 2012.

This drive-through facility has five drive-through lanes, including an ATM,

and a walk-up

teller window.

The Bank has approximately 46,000 square feet of office space

and approximately 5,000 square feet of

retail space in the new AuburnBank Center building available for lease to

third party tenants.

In February 2022, the Company entered into an agreement to sell a parcel of approximately 0.85

acres to a hotel developer.

As part of the agreement, the Bank negotiated a long-term lease with the hotel developer

for 100 to 150 parking spaces in

the Bank’s parking deck.

In October 2022, the Company closed the sale at the agreed upon price

of $4.3 million, and

recognized a $3.2 million gain.

The Opelika branch is located in Opelika, Alabama. This branch, built in 1991,

is owned by the Bank and has

approximately 4,000 square feet of space. This branch offers the full line of the

Bank’s services and has drive-through

windows and an ATM.

This branch offers parking for approximately 36 vehicles.

The Bank’s Notasulga branch was opened

in August 2001. This branch is located in Notasulga, Alabama, about 15

miles

west of Auburn, Alabama. This branch is owned by the Bank and has approximately 1,344

square feet of space. The Bank

leased the land for this branch from a third party.

In May 2022, the Bank’s land lease renewed

for another one year term.

This branch offers the full line of the Bank’s

services including safe deposit boxes and a drive-through window and parking

for approximately 11 vehicles, including a handicapped

ramp.

In November 2002, the Bank opened a loan production office

in a leased space in Phenix City,

Alabama, about 35 miles

south of Auburn, Alabama. In November 2022, the Bank renewed its lease for another

year.

In February 2009, the Bank opened a branch located on Bent Creek Road in Auburn,

Alabama. This branch is owned by the

Bank and has approximately 4,000 square feet of space. This branch offers

the full line of the Bank’s services and

has

drive-through windows and a drive-up ATM.

This branch offers parking for approximately 29 vehicles.

In December 2011, the Bank opened a branch located

on Fob James Drive in Valley,

Alabama, about 30 miles northeast of

Auburn, Alabama.

This branch is owned by the Bank and has approximately 5,000 square feet of space.

This branch offers

the full line of the Bank’s services and has drive-through

windows and a drive-up ATM.

This branch offers parking for

approximately 35 vehicles.

Prior to December 2011, the Bank had operated

a loan production office in Valley,

which was

originally opened in September 2004.

In February 2015, the Bank relocated its Auburn Kroger branch to a new location

within the Corner Village Shopping

Center, in Auburn, Alabama. In February 2015,

the Bank entered into a new lease agreement for five years with options for

two 5-year extensions. In February 2020, the Bank exercised its option to renew the lease

for another five years. The Bank

leases approximately 1,500 square feet of space for the Corner Village

branch. Prior to relocation, the Bank’s

Auburn

Kroger branch was located in the Kroger supermarket in the same shopping center

since August 1988. The current Corner

Village branch offers the

full line of the Bank’s deposit and other services including

an ATM,

but does not maintain safe

deposit boxes.

In September 2015, the Bank relocated its Auburn Wal

-Mart Supercenter branch in south Auburn, which had been opened

in 2004 to a new building, which the Bank built in 2015 at the intersection of S. Donahue

Avenue and E. University

Drive

in Auburn, Alabama.

The South Donahue branch has approximately 3,600 square feet of space.

The South Donahue

branch offers the full line of the Bank’s

services and has drive-through windows and an ATM.

This branch offers parking

for approximately 28 vehicles.

In May 2017, the Bank relocated its Opelika Kroger branch to a new location the Bank purchased

in August 2016 near the

Tiger Town

Retail Shopping Center and the intersection of U.S. Highway 280 and Frederick

Road in Opelika, Alabama.

The Tiger Town

branch, built in 2017, has approximately 5,500 square feet of space.

Prior to relocation, the Bank’s

Opelika Kroger branch was located inside the Kroger supermarket in the Tiger

Town retail center in Opelika,

Alabama. The

Opelika Kroger branch was

originally opened in July 2007. The Tiger

Town branch offers

the full line of the Bank’s

services and has drive-through windows and an ATM.

This branch offers parking for approximately 36 vehicles.

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In addition to the eight ATMs

at various branch locations, mentioned above, the Bank also has four

ATMs

located at

various locations within our primary service area.

In September 2018, the Bank opened a loan production office on East Samford

Avenue in Auburn,

Alabama.

The location

has approximately 2,500 square feet of space and is leased through 2028.

This loan production office was relocated to the

newly developed AuburnBank Center in June 2022.

The Company entered into a three year sublease agreement, during

2022, with a tenant, which has an option to renew that lease for three additional years.

ITEM 3.

LEGAL PROCEEDINGS

In the normal course of its business, the Company and the Bank from time to time are involved

in legal proceedings. The

Company’s management believe

there are no pending or threatened legal proceedings that, upon resolution, are expected

have a material adverse effect upon the Company’s

or the Bank’s financial condition

or results of operations.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY,

RELATED STOCKHOLDER

MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock is listed

on the Nasdaq Global Market, under the symbol “AUBN”. As of March 13,

2024,

there were approximately 3,493,674 shares of the Company’s

Common Stock issued and outstanding, which were held by

approximately 343 shareholders of record. The following table sets forth, for the indicated

periods, the high and low closing

sale prices for the Company’s Common Stock

as reported on the Nasdaq Global Market, and the cash dividends declared

shareholders during the indicated periods.

Closing

Cash

Price

Dividends

Per Share (1)

Declared

High

Low

2023

First Quarter

24.50

22.55

0.27

Second Quarter

24.32

18.80

0.27

Third Quarter

22.80

20.85

0.27

Fourth Quarter

21.99

19.72

0.27

2022

First Quarter

34.49

31.75

0.265

Second Quarter

33.57

27.04

0.265

Third Quarter

29.02

23.02

0.265

Fourth Quarter

24.71

22.07

0.265

(1)

The price information represents actual transactions.

The Company has paid cash dividends on its capital stock since 1985. Prior to this time, the

Bank paid cash dividends since

its organization in 1907, except during the Depression years of 1932

and 1933. Holders of Common Stock are entitled to

receive such dividends when, as and if may be declared by the Company’s

Board of Directors. The amount and frequency

of cash dividends is determined in the judgment of the Board based upon a number of factors,

including the Company’s

earnings, financial condition, liquidity,

capital and regulatory requirements and other relevant factors and the availability

dividend payable by the Bank consistent with amounts available therefore, including the Bank’s

earnings, financial

condition, liquidity, regulatory

and capital requirements and other relevant factors. The Board currently intends to continue

its present dividend policies.

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The amount of dividends payable by the Bank is limited by law and regulation.

The Company relies upon dividends from

the Bank to pay Company expenses and to pay dividends on Company common stock.

The need to maintain adequate

capital and liquidity in the Bank also limits the dividends that may be paid to the Company.

The Bank and the Company

can only pay dividends, repurchase stock and pay discretionary bonuses, if our capital

conservation buffer exceeds 2.5%

and from our eligible retained income over the last four calendar quarters.

Eligible retained income equals the greater of:

●

net income for the four preceding calendar quarters, net of any distributions and associated

tax effects not already

reflected in net income; or

●

the average net income over the preceding four quarters.

Federal Reserve policy could restrict future dividends on our Common Stock, depending

on our earnings and capital

position, risks and likely needs. See “Supervision and Regulation –

Payment of Dividends” and “Management’s Discussion

and Analysis of Financial Condition and Results of Operations – Capital

Adequacy” and “Risk Factors -

Our ability to

continue to pay dividends to shareholders and

repurchase stock in

the future is subject to our profitability,

capital, liquidity

and regulatory requirements

and these limitations may prevent or limit future

dividends.”

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Performance Graph

The following performance graph compares the cumulative, total return on the

Company’s Common Stock

from

December 31, 2018 to December 31, 2023, with that of the Nasdaq Composite Index and

S&P U.S. BMI Banks – Southeast

Region Index (assuming a $100 investment on December 31, 2018). Cumulative total

return represents the change in stock

price and the amount of dividends received over the indicated period, assuming the

reinvestment of dividends.

Period Ending

Index

12/31/2018

12/31/2019

12/30/2020

12/30/2021

12/31/2022

12/31/2023

Auburn National Bancorporation, Inc.

100.00

171.98

138.22

110.10

81.48

79.19

NASDAQ Composite Index

100.00

136.69

198.10

242.03

163.28

236.17

S&P U.S. BMI Banks - Southeast Region Index

100.00

140.94

126.37

180.49

146.81

151.44

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Issuer Purchases of Equity Securities

Period

Total Number of

Shares Purchased

Average Price Paid

per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs

The Approximate

Dollar Value

of Shares

that May Yet

Be Under

the Plans or Programs

October 1 – October 31, 2023

––

4,386,264

November 1 – November 30, 2023

––

4,386,264

December 1 – December 31, 2023

––

4,386,264

Total

––

4,386,264

On April 12, 2022, the Board of Directors of Auburn National Bancorporation, Inc. (the "Company") announced that its Board of

Directors had approved a new stock repurchase program to replace the repurchase program that expired on March 31, 2022. The new

program authorized the repurchase, from time to time, of up to $5 million of the Company’s issued and outstanding common stock

through the earliest of (i) the expenditure of $5 million on Share repurchases, (ii) the termination or replacement of the Repurchase Plan

and (iii) April 15, 2024. The stock repurchases may be open-market or private purchases, negotiated transactions, block purchases, and

otherwise.

Securities Authorized for Issuance Under Equity Compensation Plans

See the information included under Part III, Item 12, which is incorporated

in response to this item by reference.

Unregistered Sale of Equity Securities

Not applicable.

ITEM 6.

SELECTED FINANCIAL DATA

See Table 2 “Selected Financial

Data” and general discussion in Item 7, “Management’s

Discussion and Analysis of

Financial Condition and Results of Operations”.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

OPERATIONS

The following is a discussion of our financial condition at December 31,

2023 and 2022 and our results of operations for

the years ended December 31, 2023 and 2022. The purpose of this discussion is to provide

information about our financial

condition and results of operations which is not otherwise apparent from the consolidated

financial statements. The

following discussion and analysis should be read along with our consolidated

financial statements and the related notes

included elsewhere herein. In addition, this discussion and analysis contains

forward-looking statements, so you should

refer to Item 1A, “Risk Factors” and “Special Cautionary Notice Regarding Forward-Looking Statements”.

OVERVIEW

The Company was incorporated in 1990 under the laws of the State of Delaware and became a bank

holding company after

it acquired its Alabama predecessor,

which was a bank holding company established in 1984. The Bank, the Company's

principal subsidiary, is an Alabama

state-chartered bank that is a member of the Federal Reserve System and has operated

continuously since 1907. Both the Company and the Bank are headquartered

in Auburn, Alabama. The Bank conducts its

business primarily in East Alabama, including

Lee County and surrounding areas. The Bank operates full-service branches

in Auburn, Opelika, Notasulga and Valley,

Alabama.

The Bank also operates a loan production office in Phenix

City,

Alabama.

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Summary of Results of Operations

Year ended December 31

(Dollars in thousands, except per share data)

2023

2022

Net interest income (a)

26,745

27,622

Less: tax-equivalent adjustment

417

456

Net interest income (GAAP)

26,328

27,166

Noninterest income

(2,981)

6,506

Total revenue

23,347

33,672

Provision for credit losses

135

1,000

Noninterest expense

22,594

19,823

Income tax (benefit) expense

(777)

2,503

Net earnings

1,395

10,346

Basic and diluted net earnings per share

0.40

2.95

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP Financial Measures".

Financial Summary

The Company’s net earnings were $1.4

million for the full year 2023, compared to $10.3 million for the full year 2022.

Basic and diluted net earnings per share were $0.40 per share for the full year 2023,

compared to $2.95 per share for the full

year 2022.

Net earnings for 2023 included a loss on sale of securities, while 2022 net earnings included

a gain on sale of land and a

one-time payroll tax credit provided by the CARES Act.

The after-tax impact of the loss on securities reduced 2023

net

earnings by $4.7 million, while non-routine items in 2022 improved net earnings by $3.6

million.

Excluding non-routine

items, net earnings for the full year 2023 would have been $6.1 million, or $1.75

per share, compared to $6.7 million, or

$1.92 per share for the full year 2022.

Net interest income (tax-equivalent) was $26.7 million in 2023, a

3% decrease compared to $27.6 million in 2022. This

decrease was primarily due to a decline in interest earning assets, increased cost

of funds and changes in our deposit mix,

which was partially offset by a more favorable asset mix and higher

yields on interest

earnings assets.

The Company’s net

interest margin (tax-equivalent) was 2.89% in 2023,

compared to 2.81% in 2022.

Average loans for 2023 were $523.8

million, a 15% increase from 2022.

At December 31, 2023, the Company’s allowance

for credit losses was $6.9 million, or 1.23% of total loans, compared to

$5.8 million, or 1.14% of total loans, at December 31, 2022.

The implementation of CECL required pursuant to

Accounting Standards Codification (“ASC”) 326, which was effective

January 1, 2023, increased our allowance for credit

losses by $1.0 million, or 0.20% of total loans, as a day one transition adjustment.

For the full year 2023, increases in the

allowance for credit losses due to changes in the composition and balance of loans during 2023

were largely offset by

reductions in the allowance for credit losses due to the resolution of collateral dependent

nonperforming loans.

The Company recorded a provision for credit losses of $0.1 million in 2023 compared

to $1.0 million during 2022.

The

provision for credit losses under CECL is reflective of the Company’s

credit risk profile and the future economic outlook

and forecasts. Our CECL model is largely influenced by economic

factors including, most notably,

the anticipated

unemployment rate. The decrease in provision for credit losses was primarily related

to the downgrade of one borrowing

relationship in the fourth quarter of 2022, where one of these loans was repaid in full during the

second quarter of 2023.

Noninterest income was a loss of $3.0 million in 2023 compared to

income of $6.5 million in 2022.

Excluding the pre-tax

securities loss of $6.3 million related to the balance sheet repositioning strategy in 2023,

noninterest income would have

been $3.3 million for 2023,

compared to noninterest income of $3.3 million in 2022 after excluding the pre-tax gain of $3.2

million on the sale of land.

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Noninterest expense was $22.6 million in 2023 compared to $19.

million in 2022.

Excluding the impact of the one-

time payroll tax credit of $1.6 million, noninterest expense would have been $21.4

million in 2022. This increase in

noninterest expense reflects increases in net occupancy and equipment expenses of $0.2

million related to the Company’s

new headquarters, which opened in June 2022, professional fees expense of $0.

million, other real estate owned expense

of $0.1 million, FDIC and other regulatory assessments expenses of $0.2

million and other noninterest expense of $0.5

million, partially offset by decreases in salaries and benefits expense of

$0.2 million.

The provision for income taxes was a benefit of $0.8 million for an effective

tax rate of (125.73)% for 2023, compared to

tax expense of $2.5 million and an effective tax rate of 19.48% for 2022.

This decrease was primarily due to a decrease

in pre-tax earnings in 2023 resulting from the balance sheet repositioning. The

Company’s effective income

tax rate

otherwise is principally affected by tax-exempt earnings from the

Company’s investments

in municipal securities, bank-

owned life insurance, and New Markets Tax

Credits.

The Company paid cash dividends of $1.08 per share in 2023, an increase of 2% from 2022.

At December 31, 2023, the

Bank’s regulatory capital ratios

were well above the minimum amounts required to be “well capitalized” under current

regulatory standards with a total risk-based capital ratio of 15.52%, a

tier 1 leverage ratio of 9.72% and common equity tier

1 (“CET1”) of 14.52%

at December 31, 2023.

CRITICAL ACCOUNTING POLICIES

The accounting and financial reporting policies of the Company conform with U.S. generally accepted

accounting

principles and with general practices within the banking industry.

In connection with the application of those principles, we

have made judgments and estimates which, in the case of the determination of our allowance

for credit losses, our

determination of credit losses for investment securities, recurring and non-recurring

fair value measurements, the valuation

of other real estate owned, and the valuation of deferred tax assets, were critical to the determination

of our financial

position and results of operations. Other policies also require subjective judgment and

assumptions and may accordingly

impact our financial position and results of operations.

On January 1, 2023, we adopted FASB

ASU 2016-13

Financial

Instruments - Credit Losses

(Topic

326) which significantly changes our methodology for determining our allowance

for

credit losses, and ASU 2022-02

, Financial Instruments – Credit Losses (Topic

326):

Troubled

Debt Restructurings and

Vintage Disclosures

which

eliminated the accounting guidance for TDRs, while enhancing disclosure

requirements for

certain loan refinancings and restructurings by creditors when a borrower is experiencing

financial difficulty.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized

cost basis to present the net

amount expected to be collected on the loans. Loans are charged

off against the allowance when management believes the

uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts

previously

charged-off and expected to be charged-off.

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the

balance sheet date. The allowance for credit losses is estimated by management using relevant

available information, from

both internal and external sources, relating to past events, current conditions, and reasonable and

supportable forecasts.

The Company’s loan loss estimation process includes

procedures to appropriately consider the unique characteristics of

its

loan segments (commercial and industrial, construction and land development, commercial

real estate, multifamily,

residential real estate, and consumer loans).

These segments are further disaggregated into loan classes, the level at which

credit quality is monitored.

See Note 5, Loans and Allowance for Credit Losses, for additional information about our

loan

portfolio.

Credit loss assumptions are estimated using a discounted cash flow ("DCF") model

for each loan segment, except consumer

loans.

The weighted average remaining life method is used to estimate credit loss assumptions

for consumer loans.

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The DCF model calculates an expected life-of-loan loss percentage by considering the

forecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic

factors, and LGD, which is the estimate

of the amount of net loss in the event of default.

This model utilizes historical correlations between default experience and

certain macroeconomic factors as determined through a statistical regression analysis.

The forecasted Alabama

unemployment rate is considered in the model for commercial and industrial, construction

and land development,

commercial real estate, multifamily,

and residential real estate loans.

In addition, forecasted changes in the Alabama home

price index is considered in the model for construction and land development and residential

real estate loans; forecasted

changes in the national commercial real estate (“CRE”) price index is considered

in the model for commercial real estate

and multifamily loans; and forecasted changes in the Alabama gross state product

is considered in the model for

multifamily loans.

Projections of these macroeconomic factors, obtained from an independent

third party, are utilized to

forecast quarterly rates of default based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the loan, adjusted

for expected prepayments and principal

payments (“curtailments”) when appropriate. Management's determination of the

contract term excludes expected

extensions, renewals, and modifications unless the extension or

renewal option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.

To the extent the lives of the

loans in the portfolio extend

beyond the period for which a reasonable and supportable forecast can be

made (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion

period.

The weighted average remaining life method was deemed most appropriate

for the consumer loan segment because

consumer loans contain many different payment structures,

payment streams and collateral.

The weighted average

remaining life method uses an annual charge-off rate over several vintages

to estimate credit losses.

The average annual

charge-off rate is applied to the contractual term adjusted for

prepayments.

Additionally, the allowance

for credit losses calculation includes subjective adjustments for

qualitative risk factors that are

believed likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may

increase or reduce reserve levels and include adjustments for lending management experience

and risk tolerance, loan

review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,

trends in

underlying collateral, external factors and economic conditions not

already captured.

Loans that do not share risk characteristics are evaluated on an individual basis. When

management determines that

foreclosure is probable and the borrower is experiencing financial difficulty,

the expected credit losses are based on the

estimated fair value of collateral held at the reporting date, adjusted for selling costs as appropriate.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments,

such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs. The Company’s

exposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off-balance sheet

loan commitments is represented by the

contractual amount of those instruments. Such financial instruments are

recorded when they are funded.

The Company records an allowance for credit losses on off-balance

sheet credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge to provision

for credit losses in the Company’s consolidated

statements of earnings. The allowance for credit losses on off-balance sheet credit

exposures is estimated by loan segment

at each balance sheet date under the current expected credit loss model using the same

methodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-party

guarantees. The allowance for

unfunded commitments is included in other liabilities on the Company’s

consolidated balance sheets.

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Assessment for Allowance for Credit Losses – Available

-for-Sale Securities

For any securities classified as available-for-sale that are in an unrealized

loss position at the balance sheet date, the

Company assesses whether or not it intends to sell the security,

or more likely than not will be required to sell the security,

before recovery of its amortized cost basis.

If either of these criteria are met, the security's amortized cost basis is written

down to fair value through net income.

If neither criterion is met, the Company evaluates whether any portion

of the

decline in fair value is the result of credit deterioration.

Such evaluations consider the extent to which the amortized cost of

the security exceeds its fair value, changes in credit ratings and any other known adverse

conditions related to the specific

security.

If the evaluation indicates that a credit loss exists, an allowance for credit losses is

recorded for the amount by

which the amortized cost basis of the security exceeds the present value of cash flows expected

to be collected, limited by

the amount by which the amortized cost exceeds fair value.

Any impairment not recognized in the allowance for credit

losses is recognized in other comprehensive income.

The Company is required to own certain stock as a condition of membership, such as the

FHLB-Atlanta and Federal

Reserve Bank of Atlanta (“FRB”).

These non-marketable equity securities are accounted for at cost which equals par

redemption value.

These securities do not have a readily determinable fair value as their ownership is restricted and

there is

no market for these securities.

The Company records these non-marketable equity securities as a component

of other

assets, which are periodically evaluated for impairment. Management considers

these non-marketable equity securities to

be long-term investments. Accordingly,

when evaluating these securities for impairment, management considers

the

ultimate recoverability of the par value rather than by recognizing temporary declines in

value.

Fair Value

Determination

U.S. GAAP requires management to value and disclose certain of the Company’s

assets and liabilities at fair value,

including investments classified as available-for-sale and derivatives.

ASC 820,

Fair Value

Measurements and Disclosures

which defines fair value, establishes a framework for measuring fair value in accordance

with U.S. GAAP and expands

disclosures about fair value measurements.

For more information regarding fair value measurements and disclosures,

please refer to Note 14, Fair Value,

of the unaudited consolidated financial statements that accompany this report.

Fair values are based on active market prices of identical assets or liabilities when available.

Comparable assets or

liabilities or a composite of comparable assets in active markets are used when identical assets

or liabilities do not have

readily available active market pricing.

However, some of the Company’s

assets or liabilities lack an available or

comparable trading market characterized by frequent transactions between

willing buyers and sellers. In these cases, fair

value is estimated using pricing models that use discounted cash flows and

other pricing techniques. Pricing models and

their underlying assumptions are based upon management’s

best estimates for appropriate discount rates, default rates,

prepayments, market volatility and other factors, taking into account current observable

market data and experience.

These assumptions may have a significant effect on the reported

fair values of assets and liabilities and the related income

and expense. As such, the use of different models and assumptions, as

well as changes in market conditions, could result in

materially different net earnings and retained earnings results.

Deferred Tax

Asset Valuation

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available

evidence, it is more-likely-

than-not that some portion or the entire deferred tax asset will not be realized. The ultimate

realization of deferred tax assets

is dependent upon the generation of future taxable income during the periods

in which those temporary differences become

deductible. Management considers the scheduled reversal of deferred

tax liabilities, projected future taxable income and tax

planning strategies in making this assessment. At December 31,

2023 we had total deferred tax assets of $12.5 million

included as “other assets”, including $9.7 million resulting from unrealized losses in our securities

portfolio.

Based upon

the level of taxable income over the last three years and projections for future taxable

income over the periods in which the

deferred tax assets are deductible, management believes it is more likely than

not that we will realize the benefits of these

deductible differences at December 31, 2023.

The amount of the deferred tax assets considered realizable, however,

could

be reduced if estimates of future taxable income are reduced.

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Average Balance

Sheet and Interest Rates

Year ended December 31

2023

2022

Average

Yield/

Average

Yield/

(Dollars in thousands)

Balance

Rate

Balance

Rate

Loans and loans held for sale

523,838

4.76%

454,604

4.45%

Securities - taxable

335,366

2.15%

364,006

1.81%

Securities - tax-exempt (a)

52,122

3.81%

61,614

3.53%

Total securities

387,488

2.37%

425,620

2.06%

Federal funds sold

5,221

4.79%

43,766

1.00%

Interest bearing bank deposits

8,593

4.92%

58,141

0.99%

Total interest-earning assets

925,140

3.76%

982,131

3.05%

Deposits:

NOW

193,451

0.99%

197,177

0.19%

Savings and money market

289,235

0.74%

327,139

0.20%

Certificates of deposits

175,085

2.25%

154,273

0.84%

Total interest-bearing deposits

657,771

1.21%

678,589

0.34%

Short-term borrowings

3,255

2.21%

4,516

1.33%

Total interest-bearing liabilities

661,026

1.22%

683,105

0.35%

Net interest income and margin (a)

26,745

2.89%

27,622

2.81%

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP

Financial Measures".

RESULTS

OF OPERATIONS

Net Interest Income and Margin

Net interest income (tax-equivalent) was $26.7 million in 2023, compared

to $27.6 million in 2022.

This decrease was

primarily due to a decline in interest earning assets and higher costs of funds partially offset

by improvements in the

Company’s yield on interest earning assets.

Net interest margin (tax-equivalent) increased

to 2.89% in 2023, compared to

2.81% in 2022.

This increase was

primarily due to a more favorable asset mix and higher yields on interest earning

assets.

These higher yields on interest earning assets were partially offset by

increased cost of funds.

During 2023, the cost of

funds increased to 122 basis points, compared to 35 basis points during 2022.

Since March of 2022, the Federal Reserve

increased the target federal funds range from 0 – 0.25% to 5.25

– 5.50%.

The tax-equivalent yield on total interest-earning assets increased by 71 basis points

to 3.76% in 2023 compared to 3.05%

in 2022.

This increase was primarily due to changes in our asset mix and higher market interest

rates on interest earning

assets.

The cost of total interest-bearing liabilities increased by 87 basis points to

1.22%

in 2023 compared to 0.35% in 2022.

Our

deposit costs may continue to increase if the Federal Reserve

maintains or increases its target federal funds rate, market

interest rates increase, and as customer behaviors change as a result of inflation and higher

market interest rates, and we

compete for deposits against other banks, money market mutual funds

Treasury securities and other interest bearing

alternative investments.

The Company continues to deploy various asset liability management strategies

to manage its risk from interest rate

fluctuations.

Deposit and loan pricing remains competitive in our markets.

We believe this

challenging rate environment

will continue in 2024.

Our ability to compete and manage our deposits costs until our interest-earning assets reprice

and we

generate new fixed rate loans with current market interest rates will be important to our

net interest margin during the

monetary tightening cycle that we believe will continue in 2024.

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Provision for Credit Losses

On January 1, 2023, we adopted ASC 326, which introduces the current expected

credit losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loans.

Accordingly, the provision for credit

losses represents a charge to earnings necessary to establish an allowance

for credit losses that, in management's evaluation,

is adequate to provide coverage for all expected credit losses.

The Company recorded a provision for credit losses of $0.1

million during 2023, compared to a provision for loan losses of $1.0 million for 2022.

Provision for credit losses expense is

affected by organic loan growth in our loan portfolio,

our internal assessment of the credit quality of the loan portfolio, our

expectations about future economic conditions and net charge-offs.

Our CECL model is largely influenced by economic

factors including, most notably,

the anticipated unemployment rate, which may be affected

by monetary policy.

The

provision for credit losses during 2023 was primarily related to an increase in the calculation

of current expected credit

losses due to loan growth during 2023.

This was largely offset by the resolution of a collateral dependent

nonperforming

loan, with a recorded investment of $1.3 million and a corresponding allowance of $0.5

million, that was collected in full

during the second quarter of 2023.

Our allowance for credit losses reflects an amount we believe appropriate,

based on our allowance assessment

methodology, to adequately cover

all expected credit losses as of the date the allowance is determined.

At December 31,

2023, the Company’s allowance

for credit losses was $6.9

million, or 1.23% of total loans, compared to $5.8 million, or

1.14% of total loans, at December 31, 2022.

The implementation of CECL, as of January 1, 2023, increased our allowance

for credit losses by $1.0 million, or 0.20% of total loans, as a day one transition adjustment

to ASC 326.

Noninterest Income

Year ended December 31

(Dollars in thousands)

2023

2022

Service charges on deposit accounts

603

598

Mortgage lending

430

650

Bank-owned life insurance

411

317

Gain on sale of premises and equipment

—

3,234

Securities (losses) gains, net

(6,295)

Other

1,870

1,695

Total noninterest income

(2,981)

6,506

The Company’s noninterest income from

mortgage lending is primarily attributable to the (1) origination and sale of new

mortgage loans and (2) servicing of mortgage loans. Origination income, net, is comprised

of gains or losses from the sale

of the mortgage loans originated, origination fees, underwriting fees and other fees

associated with the origination of

mortgage loans, which are netted against the commission expense associated

with these originations. The Company’s

normal practice is to originate mortgage loans for sale in the secondary

market and to either sell or retain the MSRs when

the loan is sold.

MSRs are recognized based on the fair value of the servicing right on the date the corresponding

mortgage loan is sold.

Subsequent to the date of transfer, the Company

has elected to measure its MSRs under the amortization method.

Servicing

fee income is reported net of any related amortization expense.

The Company evaluates MSRs for impairment quarterly.

Impairment is determined by grouping MSRs by common

predominant characteristics, such as interest rate and loan type.

If the aggregate carrying amount of a particular group of

MSRs exceeds the group’s aggregate

fair value, a valuation allowance for that group is established.

The valuation

allowance is adjusted as the fair value changes.

An increase in mortgage interest rates typically results in an increase in the

fair value of the MSRs while a decrease in mortgage interest rates typically results in a decrease

in the fair value of MSRs.

The following table presents a breakdown of the Company’s

mortgage lending income for 2023 and 2022.

Year ended December 31

(Dollars in thousands)

2023

2022

Origination income

309

Servicing fees, net

359

341

Total mortgage lending income

430

650

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The Company’s income from mortgage lending

typically fluctuates as mortgage interest rates change and is primarily

attributable to the origination and sale of new mortgage loans.

Origination income decreased as market interest rates on

mortgage loans increased and mortgage loan volumes also decreased.

The decrease in origination income was partially

offset by an increase in mortgage servicing fees, net of related

amortization expense as mortgage prepayment speeds

slowed, resulting in decreased amortization expense.

Income from bank-owned life insurance was $411

thousand and $317 thousand for 2023 and 2022, respectively.

Excluding

a $52 thousand non-taxable death benefit received during 2023, income from bank

-owned life insurance would have been

$359 thousand and $317 thousand for 2023 and 2022, respectively.

In October 2022, the Company closed the sale of approximately 0.85 acres of land located

next to the Company’s

headquarters in Auburn, Alabama for a purchase price of $4.3 million.

The sale resulted in a gain of $3.2 million, net of

prorations, closing costs and costs of demolishing the Bank’s

former main office

building.

In December 2023, the Company announced it had repositioned its balance sheet by selling

approximately $117.6 million,

or 27%, of its available-for-sale securities with a

weighted average book yield of 2.11% and a

weighted average duration of

4.0 years, resulting in net losses on sale of the securities of approximately $6.3

million. Proceeds of $111.3

million from the

sale of securities were used to repay wholesale funding of $48.0

million with a weighted average cost of 5.38%, while the

remaining amounts were held in cash to fund future loan growth, higher-yielding

securities, and other banking operations.

Other noninterest income was $1.9 million and $1.7 million for 2023

and 2022, respectively.

The increase in other

noninterest income was primarily related to insurance proceeds of $0.2

million received during 2023 related to property

claims.

Noninterest Expense

Year ended December 31

(Dollars in thousands)

2023

2022

Salaries and benefits

12,101

12,307

Employee retention credit

—

(1,569)

Net occupancy and equipment

2,954

2,742

Professional fees

1,299

975

FDIC and other regulatory assessments

631

404

Other

5,609

4,964

Total noninterest expense

22,594

19,823

Salaries and benefits decreased during 2023 compared to 2022.

A decrease in the number of full-time equivalents was

partially offset by routine annual increases in salaries and

wages.

The employee retention tax credit of $1.6 million in 2022 relates to a one-time payroll tax

credit provided by the CARES

Act and the 2020 Consolidated Appropriations Act.

The increase in net occupancy and equipment expense was primarily due to increased

expenses related to the Company’s

new headquarters in downtown Auburn.

This amount includes depreciation expense and costs associated with ope

rating of

the new headquarters.

The Company relocated its main office branch and bank operations into

its newly constructed

headquarters during June 2022.

The increase in professional fees expense during 2023 compared to

2022 was primarily related to increased consulting and

audit related fees during 2023.

The increase in FDIC and other regulatory assessments during 2023 compared to

2022 was primarily related to increases in

the FDIC’s initial base deposit insurance assessment

rate.

On October 18, 2022, the FDIC adopted an amended restoration

plan to increase the likelihood that the reserve ratio would be restored to at least 1.35%

by September 30, 2028.

The

FDIC’s amended restoration plan increases the

initial base deposit insurance assessment rate schedules uniformly by 2 basis

points, which began the first quarterly assessment period of 2023.

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The increase in other noninterest expense was due to a variety of items including software

costs, ATM

and checkcard

expenses, impairment related to new market tax credit investment due to remaining tax

credit being less than the

Company’s investment, and a gain on sale of other

real estate owned that was realized in 2022.

Income Tax

Expense

The provision for income taxes was a benefit of $0.8 million for an effective

tax rate of (125.73)% for 2023, compared to

tax expense of $2.5 million and an effective tax rate of 19.48% for 2022.

This decrease was primarily due to a decrease

in pre-tax earnings in 2023 resulting from the balance sheet repositioning. The Company’s

effective income tax rate

otherwise is principally affected by tax-exempt earnings from the

Company’s investments

in municipal securities, bank-

owned life insurance, and New Markets

Tax Credits.

BALANCE SHEET ANALYSIS

Securities

Securities available-for-sale were $270.9

million at December 31, 2023, compared to $405.3 million at December 31, 2022.

This decrease reflects a decrease in the amortized cost basis of securities available-for-sale

of $150.3 million, offset by an

increase of $15.9 million in the fair value of securities available-for-sale.

The decrease in the amortized cost basis of

securities available-for-sale was primarily attributable to

the sale of $117.6 million securities available-for-sale

as part of

the balance sheet repositioning in December 2023 and normal paydowns and maturities on

other securities.

The increase

in the fair value of securities was primarily due to a decrease in long-term

market interest rates at the end of 2023.

The

average annualized tax-equivalent yields earned on total securities were 2.37

in 2023 and 2.06% in 2022.

The following table shows the carrying value and weighted average yield of securities available

-for-sale as of December

31, 2023 according to contractual maturity.

Actual maturities may differ from contractual maturities of mortgage-backed

securities (“MBS”) because the mortgages underlying the securities may be called

or prepaid with or without penalty.

December 31, 2023

1 year

1 to 5

5 to 10

After 10

Total

(Dollars in thousands)

or less

years

Fair Value

Agency obligations

331

10,339

43,209

—

53,879

Agency MBS

15,109

22,090

161,058

198,289

State and political subdivisions

—

9,691

9,051

18,742

Total available-for-sale

363

25,448

74,990

170,109

270,910

Weighted average yield (1):

Agency obligations

3.40%

0.99%

1.66%

—

1.54%

Agency MBS

3.47%

1.19%

1.84%

2.20%

2.08%

State and political subdivisions

—

1.95%

2.55%

2.23%

Total available-for-sale

3.41%

1.11%

1.75%

2.21%

1.98%

(1) Yields are calculated based on amortized cost.

Loans

December 31

(In thousands)

2023

2022

Commercial and industrial

73,374

66,212

Construction and land development

68,329

66,479

Commercial real estate

287,307

264,573

Residential real estate

117,457

97,648

Consumer installment

10,827

9,546

Total loans

557,294

504,458

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Total loans, net of unearned income,

were $557.3 million at December 31, 2023, and $504.5 million at December

31, 2022,

an increase of $52.8 million, or 11%.

Four loan categories represented the majority of the loan portfolio at December 31,

2023: commercial real estate (52%), residential real estate (21%), construction and land development

(12%), and

commercial and industrial (13%).

Approximately 23% of the Company’s commercial

real estate loans were classified as

owner-occupied at December 31, 2023.

Within the residential real estate portfolio

segment, the Company had junior lien mortgages of approximately $8.7 million,

or 2%, and $7.4 million, or 1%, of total loans at December 31, 2023 and 2022, respectively.

For residential real estate

mortgage loans with a consumer purpose, the Company had no loans that required interest only payments

at December 31,

2023 and 2022. The Company’s residential

real estate mortgage portfolio does not include any option ARM loans,

subprime loans, or any material amount of other consumer mortgage products

which are generally viewed as high risk.

The average yield earned on loans and loans held for sale was 4.76% in 2023

and 4.45% in 2022.

The specific economic and credit risks associated with our loan portfolio include,

but are not limited to, the effects of

current economic conditions, including inflation and the continuing higher

levels of market interest rates, remaining

COVID-19 pandemic effects including supply chain disruptions,

commercial office occupancy levels, housing supply

shortages and inflation, on our borrowers’ cash flows, real estate market sales volumes

and liquidity,

valuations used in

making loans and evaluating collateral, availability and cost of financing properties,

real estate industry concentrations,

competitive pressures from a wide range of other lenders, deterioration in certain credits,

interest rate fluctuations, reduced

collateral values or non-existent collateral, title defects, inaccurate appraisals, financial

deterioration of borrowers, fraud,

and any violation of applicable laws and regulations.

Various

projects financed earlier that were based on lower interest

rate assumptions than currently in effect may not be as profitable or

successful at the higher interest rates currently in effect

and which may exist in the future.

The Company attempts to reduce these economic and credit risks through its loan-to-value

guidelines for collateralized

loans, investigating the creditworthiness of borrowers and monitoring borrowers’ financial

position. Also, we have

established and periodically review,

our lending policies and procedures. Banking regulations limit a bank’s

credit exposure

by prohibiting unsecured loan relationships that exceed 10% of its capital; or 20% of capital,

if loans in excess of 10% of

capital are fully secured. Under these regulations, we are prohibited from having secured

loan relationships in excess of

approximately $22.2 million. Furthermore, we have an internal limit

for aggregate credit exposure (loans outstanding plus

unfunded commitments) to a single borrower of $20.0 million. Our loan policy requires

that the Loan Committee of the

Board of Directors approve any loan relationships that exceed this internal limit.

At December 31, 2023, the Bank had one

loan relationship exceeding our internal limit.

We periodically analyze

our commercial loan portfolio to determine if a concentration of credit

risk exists in any one or

more industries. We

use classification systems broadly accepted by the financial services industry in

order to categorize our

commercial borrowers. Loan concentrations to borrowers in the following classes

exceeded 25% of the Bank’s total risk-

based capital at December 31, 2023 (and related balances at December 31,

2022).

December 31

(In thousands)

2023

2022

Lessors of 1-4 family residential properties

56,912

52,278

Multi-family residential properties

45,841

41,084

Hotel/motel

39,131

33,378

Office buildings

30,871

27,074

The Company maintains the allowance for credit losses at a level that management believes

appropriate to adequately cover

the Company’s estimate of expected

losses in the loan portfolio. The allowance for credit losses was $6.9 million at

December 31, 2023 compared to $5.8 million at December 31, 2022, which management

believed to be adequate at each of

the respective dates. The assumptions, judgments and estimates, as well as the

methodologies and models associated with

the determination of the allowance for credit losses are described under “Critical Accounting Policies.”

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On January 1, 2023, we adopted ASC 326, which introduces the current expected

credit losses (CECL) methodology and

requires us to estimate all expected credit losses over the remaining life of our loan portfolio.

Accordingly, beginning in

2023, the allowance for credit losses represents an amount that, in management's evaluation,

is adequate to provide

coverage for all expected future credit losses on outstanding loans. As of December

31, 2023 and December 31, 2022, our

allowance for credit losses was approximately $6.9 million and $5.8

million, respectively, which our

management believes

to be adequate at each of the respective dates. Our allowance for credit losses as a percentage of total

loans was 1.23% at

December 31, 2023, compared to 1.14% at December 31, 2022.

The increase in the allowance for credit losses is largely the result of the implementation

of ASC 326 on January 1, 2023,

which resulted in an adjustment to the opening balance of the allowance for credit losses of

$1.0 million. Our CECL models

rely largely on projections of macroeconomic conditions to estimate

future credit losses. Macroeconomic factors used in the

model include the Alabama unemployment rate, the Alabama home price index, the national

commercial real estate price

index and the Alabama gross state product. Projections of these macroeconomic

factors, obtained from an independent third

party, are utilized to predict

quarterly rates of default.

See Note 5 to our Financial Statements.

Under the CECL methodology the allowance for credit losses is measured

on a collective basis for pools of loans with

similar risk characteristics, and for loans that do not share similar risk characteristics

with the collectively evaluated pools,

evaluations are performed on an individual basis. Losses are predicted over

a period of time determined to be reasonable

and supportable, and at the end of the reasonable and supportable period

losses are reverted to long term historical averages.

At December 31, 2023, reasonable and supportable periods of 4 quarters were utilized

followed by an 8 quarter straight line

reversion period to long term averages.

A summary of the changes in the allowance for credit losses and certain asset quality

ratios for the years ended December

31, 2023 and 2022 are presented below.

Year ended December 31

(Dollars in thousands)

2023

2022

Allowance for credit losses:

Balance at beginning of period

5,765

4,939

Impact of adopting ASC 326

1,019

—

Charge-offs:

Commercial and industrial

(164)

(222)

Consumer installment

(105)

(70)

Total charge

-offs

(269)

(292)

Recoveries:

Commercial and industrial

204

Commercial real estate

—

Residential real estate

Consumer installment

Total recoveries

223

118

Net charge-offs

(46)

(174)

Provision for credit losses

125

1,000

Ending balance

6,863

5,765

as a % of loans

1.23

1.14

as a % of nonperforming loans

753

211

Net charge-offs

as a % of average loans

0.01

0.04

Nonperforming Assets

At December 31, 2023 the Company had $0.9 million in nonperforming assets compared

to $2.7 million at December 31,

2022.

The decrease in nonperforming was primarily related to the resolution of a collateral

dependent nonperforming loan

relationship, with a recorded investment of $1.3 million, that was collected in full during

the second quarter of 2023.

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The table below provides information concerning total nonperforming assets

and certain asset quality ratios.

December 31

(Dollars in thousands)

2023

2022

Nonperforming assets:

Nonperforming (nonaccrual) loans

911

2,731

Total nonperforming assets

911

2,731

as a % of loans and other real estate owned

0.16

0.54

as a % of total assets

0.09

0.27

Nonperforming loans as a % of total loans

0.16

0.54

Accruing loans 90 days or more past due

—

The table below provides information concerning the composition of nonaccrual

loans at December 31, 2023 and 2022,

respectively.

December 31

(In thousands)

2023

2022

Nonaccrual loans:

Commercial and industrial

—

443

Commercial real estate

783

2,116

Residential real estate

128

172

Total nonaccrual loans

911

2,731

The Company discontinues the accrual of interest income when (1) there is a significant

deterioration in the financial

condition of the borrower and full repayment of principal and interest is not expected or

(2) the principal or interest is more

than 90 days past due, unless the loan is both well-secured and in the process of collection.

There were no loans 90 days past due and still accruing interest at December 31, 2023

and 2022, respectively.

The Company had no OREO at December 31, 2023 and 2022, respectively.

Deposits

December 31

(In thousands)

2023

2022

Noninterest bearing demand

270,723

311,371

NOW

190,724

178,641

Money market

148,040

214,298

Savings

88,541

95,652

Certificates of deposit under $250,000

100,572

93,017

Certificates of deposit and other time deposits of $250,000 or more

97,643

57,358

Total deposits

896,243

950,337

Total deposits decreased

$54.1 million, or 6%, to $896.2 million at December 31, 2023,

compared to $950.3 million at

December 31, 2022.

During 2023, deposit outflows due to the sale of $59.0 million of reciprocal deposits

were partially

offset by net deposit inflows of $4.9 million. The Company

had no brokered deposits at December 31, 2023 and 2022.

The

Company had no FHLB-Atlanta advances or other wholesale borrowings outstanding

at December 31, 2023 and 2022.

Noninterest-bearing deposits were $270.7 million, or 30% of total deposits, at December

31, 2023, compared to $311.4

million, or 33% of total deposits at December 31, 2022.

The decrease reflects net outflows to higher yield investment

alternatives in a rising interest rate environment and a decline in balances in existing accounts due to

increased customer

spending.

The average rates paid on total interest-bearing deposits were 1.21

in 2023 and 0.34% in 2022.

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At December 31, 2023, estimated uninsured deposits totaled $356.3

million, or 40% of total deposits, compared to $381.7

million, or 40% of total deposits at December 2022.

During 2023, the Bank began participating in the Certificates of

Deposit Account Registry Service (the “CDARS”) and the Insured Cash Sweep

product (“ICS”), which provide for

reciprocal (“two-way”) transactions among banks facilitated by IntraFi for the purpose

of maximizing FDIC insurance.

The

Company had no reciprocal deposits at December 31, 2023.

Uninsured amounts are estimated based on the portion of

account balances that exceed FDIC insurance limits.

The Bank’s uninsured deposits at December

31, 2023 and 2022

include approximately $206.2 million and $155.0 million, respectively,

of deposits of state, county and local governments

that are collateralized by securities having a fair value equal to such deposits.

Deposits of state, county and local

governments were 53% and 41% of our estimated uninsured deposits at December

31, 2023 and 2022, respectively.

The FDIC has proposed a special assessment on uninsured deposits of banks with over $5

billion in uninsured deposits to

the FDIC Deposit Insurance Fund’s costs

of the systemic risk determination made in connection with two recent bank

failures.

This proposal will not apply to AuburnBank.

Other Borrowings

The Company had no long-term debt at December 31, 2023 and 2022.

The Bank utilizes short and long-term non-deposit

borrowings from time to time. Short-term borrowings generally consist of federal

funds purchased and securities sold under

agreements to repurchase with an original maturity of one year or

less.

The Bank had available federal funds lines totaling

$61.0 million with no federal funds borrowed at December 31,

2023 and 2022, respectively. Securities

sold under

agreements to repurchase, which were entered into on behalf of certain customers

totaled $1.5

million and $2.6 million at

December 31, 2023 and 2022, respectively.

At December 31, 2023 and 2022, the Bank had no borrowings from the

Federal Reserve discount window.

The Company did not borrow under the Federal Reserve BTFP during 2023.

The Bank is a member of the FHLB-Atlanta and has borrowed, and may in the future borrow

from time to time under the

FHLB-Atlanta’s advance program

to obtain funding for its growth.

FHLB-Atlanta advances include both fixed and

variable terms and are taken out with varying maturities, and

which generally are secured by eligible assets.

The Bank had

no borrowings under FHLB-Atlanta’s advance

program at December 31, 2023 and 2022, respectively.

At those dates, the

Bank had $309.1 million and $312.6 million, respectively,

of available lines of credit at the FHLB-Atlanta.

Advances

include both fixed and variable terms and may be taken out with varying maturities.

The average rates paid on short-term borrowings were 2.21%

and 1.33%

in 2023 and 2022, respectively.

CAPITAL ADEQUACY

At December 31, 2023, the Company’s cons

olidated stockholders’ equity (book value) was $76.5 million, or $21.90

per

share, compared to $68.0 million, or $19.42 per share, at December 31, 2022. The increase

from December 31, 2022 was

primarily driven by net earnings of $1.4 million and other comprehensive income

of $11.9 million related to unrealized

gains/losses on securities available-for-sale, net of tax. These

increases were partially offset by cash dividends paid of

$3.8 million, a one-time charge of $0.8 million, net of tax, for the cumulative

effect to adopt the CECL accounting standard

on January 1, 2023, and $0.2 million in repurchases of the Company’s

common stock.

Unrealized securities losses do not

affect the Bank’s capital

for regulatory capital purposes.

The Company paid cash dividends of $1.08 per share in 2023, an increase of 2% from the

same period in 2022.

The

Company’s share repurchases

of $0.2 million since December 31, 2022 resulted in 10,108 fewer outstanding common

shares at December 31, 2023.

These shares were repurchased at an average cost per share of $22.63.

On January 1, 2015, the Company and Bank became subject to the Basel III regulatory capital

framework. The rules

included the implementation of a capital conservation buffer of CET1

capital of 2.5% that is added to the minimum

requirements for capital adequacy purposes.

A banking organization with a capital conservation buffer

of 2.5% or less is

subject to limitations on capital distributions from “eligible retained earnings”,

including dividend payments, share

repurchases and certain discretionary bonus payments. At December 31,

2023 and 2022, the Bank had a capital

conservation buffer of 7.52% and 8.25%, respectively.

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On August 26, 2020, the Federal Reserve and the other federal banking regulators adopted

a final rule that amended the

capital conservation buffer.

The new rule revises the definition of “eligible retained income”

for purposes of the maximum

payout ratio to allow banking organizations to more freely use their capital buffers

to promote lending and other financial

intermediation activities, by making the limitations on capital distributions

more gradual.

The eligible retained income is

now the greater of (i) net income for the four preceding quarters, net of distributions and associated

tax effects not reflected

in net income; and (ii) the average of all net income over the preceding four quarters.

This rule only affects the capital

buffers, and banking organizations were encouraged to

make prudent capital distribution decisions.

The Federal Reserve has treated us as a “small bank holding company’ under the Federal

Reserve’s Small Bank Holding

Company Policy. Accordingly,

our capital adequacy is evaluated at the Bank level, and not for the Company and its

consolidated subsidiaries. The Bank’s

tier 1 leverage ratio was 9.72%, CET1 risk-based capital ratio was 14.52%,

tier 1

risk-based capital ratio was 14.52%, and total risk-based capital ratio was 15.52%

at December 31, 2023. These ratios

exceed the minimum regulatory capital percentages of 5.0% for tier 1 leverage ratio,

6.5% for CET1 risk-based capital

ratio, 8.0% for tier 1 risk-based capital ratio, and 10.0% for total risk-based capital ratio

to be considered “well capitalized.”

The Bank’s capital conservation buffer

was 7.52%

at December 31, 2023.

On July 27, 2023, the Federal Reserve, the Comptroller of the Currency and the FDIC issued

a joint notice of proposed

rulemaking to implement the Basel III endgame components.

The proposal which is subject to public comment and change

only applies to banks and holding companies with $100 billion or more of assets.

The proposal includes provisions dealing

with:

●

Credit risk, which arises from the risk than an obligor fails to perform on an obligation

;

●

Market risk, which results from changes in the value of trading positions;

●

Operational risk, which is the risk of losses resulting from inadequate or failed internal process,

people, and

systems, or from external events; and

●

Credit valuation adjustment risk, which results from the risk of losses on certain derivative

contracts.

The Basel III endgame regulatory proposals are not applicable to the Company or the Bank.

MARKET AND LIQUIDITY RISK MANAGEMENT

Management’s objective is to manage assets and

liabilities to provide a satisfactory,

consistent level of profitability within

the framework of established liquidity,

loan, investment, borrowing, and capital policies. The Bank’s

Asset Liability

Management Committee (“ALCO”) is charged with the responsibility

of monitoring these policies, which are designed to

ensure an acceptable asset/liability composition. Two

critical areas of focus for ALCO are interest rate risk and liquidity

risk management.

Interest Rate Risk Management

In the normal course of business, the Company is exposed to market risk arising from

fluctuations in interest rates because

assets and liabilities may mature or reprice at different times. For example,

if liabilities reprice faster than assets, and

interest rates are generally rising, earnings will initially decline. In addition, assets

and liabilities may reprice at the same

time but by different amounts. For example, when the general level of interest rates is rising,

the Company may increase

rates paid on interest bearing demand deposit accounts and savings deposit

accounts by an amount that is less than the

general increase in market interest rates. Also, short-term and long-term

market interest rates may change by different

amounts. For example, a flattening yield curve may reduce the interest spread

between new loan yields and funding costs.

The yield curve has been inverted during 2023 and in the first months of 2024.

An inverted yield curve reduces the net

interest margin expansion that may be expected otherwise as

interest rates rise.

Further, the remaining maturity of

various

assets and liabilities may shorten or lengthen as interest rates change. For example, if long-term

mortgage interest rates

decline sharply, mortgage-backed

securities in the securities portfolio may prepay earlier than anticipated,

which could

reduce earnings. Interest rates may also have a direct or indirect effect

on loan demand, loan losses, mortgage origination

volume, the fair value of MSRs and other items affecting earnings.

ALCO measures and evaluates the interest rate risk so that we can meet customer demands

for various types of loans and

deposits. ALCO determines the most appropriate amounts of on-balance

sheet and off-balance sheet items. Measurements

used to help manage interest rate sensitivity include an earnings simulation and an economic

value of equity model.

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Earnings simulation

Management believes that interest rate risk is best estimated by our earnings simulation

modeling. On at least a quarterly

basis, we simulate the following 12-month time period to determine a baseline

net interest income forecast and the

sensitivity of this forecast to changes in interest rates. The baseline forecast assumes an

unchanged or flat interest rate

environment. Forecasted levels of earning assets, interest-bearing liabilities, and

off-balance sheet financial instruments are

combined with ALCO forecasts of market interest rates for the next 12

months and other factors in order to produce various

earnings simulations and estimates.

To help limit interest rate risk,

we have guidelines for earnings at risk which seek to limit the variance of net interest

income from gradual changes in interest rates.

For changes up or down in rates from management’s

flat interest rate

forecast over the next 12 months, policy limits for net interest income variances are as follows:

+/- 20% for a gradual change of 400 basis points

+/- 15% for a gradual change of 300 basis points

+/- 10% for a gradual change of 200 basis points

+/- 5% for a gradual change of 100 basis points

The following table reports the variance of net interest income over the next 12

months assuming a gradual change in

interest rates up or down when compared to the baseline net interest income

forecast at December 31, 2023.

Changes in Interest Rates

Net Interest Income % Variance

400 basis points

(5.45)

300 basis points

(3.85)

200 basis points

(2.32)

100 basis points

(1.03)

(100) basis points

(0.57)

(200) basis points

(1.33)

(300) basis points

(2.12)

(400) basis points

(2.95)

At December 31, 2023, our earnings simulation model indicated that

we were in compliance with the policy guidelines

noted above.

Economic Value

of Equity

Economic value of equity (“EVE”) measures the extent that estimated economic

values of our assets, liabilities and off-

balance sheet items will change as a result of interest rate changes. Economic values are

estimated by discounting expected

cash flows from assets, liabilities and off-balance sheet items, to

which establish

a base case EVE. In contrast with our

earnings simulation model which evaluates interest rate risk over a 12-month

timeframe, EVE uses a terminal horizon

which allows for the re-pricing of all assets, liabilities, and off-balance sheet items.

Further, EVE is measured using values

as of a point in time and does not reflect any actions that ALCO might take in responding to

or anticipating changes in

interest rates, or market and competitive conditions.

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To help limit interest rate risk,

we have stated policy guidelines for an instantaneous basis point change in interest rates,

such that our EVE should not decrease from our base case by more than the following:

35% for an instantaneous change of +/- 400 basis points

30% for an instantaneous change of +/- 300 basis points

25% for an instantaneous change of +/- 200 basis points

15% for an instantaneous change of +/- 100 basis points

The following table reports the variance of EVE assuming an immediate change in

interest rates up or down when

compared to the baseline EVE at December 31, 2023.

Changes in Interest Rates

EVE % Variance

400 basis points

(20.15)

300 basis points

(12.94)

200 basis points

(6.79)

100 basis points

(2.76)

(100) basis points

(0.13)

(200) basis points

(3.45)

(300) basis points

(10.88)

(400) basis points

(12.07)

At December 31, 2023, our EVE model indicated that we were in compliance

with the policy guidelines noted above.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income

will be affected by

changes in interest rates. Income associated with interest-earning assets and costs associated

with interest-bearing liabilities

may not be affected uniformly by changes in interest rates. In addition,

the magnitude and duration of changes in interest

rates may have a significant impact on net interest income. For example, although certain

assets and liabilities may have

similar maturities or periods of repricing, they may react in different

degrees to changes in market interest rates, and other

economic and market factors, including market perceptions.

Interest rates on certain types of assets and liabilities fluctuate

in advance of changes in general market rates, while interest rates on other types of assets

and liabilities may lag behind

changes in general market rates. In addition, certain assets, such as adjustable-rate

mortgage loans, have features (generally

referred to as “interest rate caps and floors”) which limit changes in interest rates.

Prepayment and early withdrawal levels

also could deviate significantly from those assumed in calculating the maturity of certain instruments.

The ability of many

borrowers to service their debts also may decrease during periods of rising interest rates or

economic stress, which may

differ across industries and economic sectors. ALCO reviews each of the

above interest rate sensitivity analyses along with

several different interest rate scenarios in seeking satisfactory,

consistent levels of profitability within the framework of the

Company’s established liquidity,

loan, investment, borrowing, and capital policies.

The Company may also use derivative financial instruments to improve the balance between

interest-sensitive assets and

interest-sensitive liabilities and as one tool to manage interest rate sensitivity

while continuing to meet the credit and

deposit needs of our customers. From time to time, the Company may enter into

interest rate swaps (“swaps”) to facilitate

customer transactions and meet their financing needs. These swaps qualify as derivatives,

but are not designated as hedging

instruments. At December 31, 2023 and 2022, the Company had no derivative

contracts to assist in managing interest rate

sensitivity.

Liquidity Risk Management

Liquidity is the Company’s ability to convert

assets into cash equivalents in order to meet daily cash flow requirements,

primarily for deposit withdrawals, loan demand and maturing obligations. Without

proper management of its liquidity,

the

Company could experience higher costs of obtaining funds due to insufficient liquidity,

while excessive liquidity can lead

to a decline in earnings due to the cost of foregoing alternative higher-yielding

investment opportunities.

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Liquidity is managed at two levels. The first is the liquidity of the Company.

The second is the liquidity of the Bank. The

management of liquidity at both levels is essential, because the Company and the Bank are

separate and distinct legal

entities with different funding needs and sources, and each are subject

to regulatory guidelines and requirements. The

Company depends upon dividends from the Bank for liquidity to pay its operating expenses,

debt obligations and

dividends. The Bank’s payment of dividends depends

on its earnings, liquidity, capital

and the absence of any regulatory

restrictions.

The primary source of funding and liquidity for the Company has been dividends received

from the Bank. The Company

depends upon dividends from the Bank for liquidity to pay its operating expenses, debt

obligations, if any, and cash

dividends on, and repurchases of, Company common stock.

The Bank’s payment of dividends depends

on its earnings,

liquidity, capital and the absence

of any regulatory restrictions.

If needed, the Company could also issue common stock or

other securities.

Primary sources of funding for the Bank include customer deposits, other borrowings,

interest payments on earning assets,

repayment and maturity of securities and loans, sales of securities, and the sale of loans,

particularly residential mortgage

loans. Primary uses of funds include repayment of maturing obligations and

growing the loan portfolio.

The Bank has access to federal funds lines from various banks and borrowings from

the Federal Reserve discount window,

although it was not used by the Bank, the Federal Reserve’s

BTFP borrowing facility was available to the Bank during

2023.

In addition to these sources, the Bank is eligible to participate in the FHLB-Atlanta’s

advance program to obtain

funding for growth and liquidity.

Advances include both fixed and variable terms and may be taken out with varying

maturities. At December 31, 2023, the Bank had no FHLB-Atlanta advances outstanding

and available credit from the

FHLB-Atlanta of $312.6 million. At December 31, 2023, the Bank also had $61.0

million of available federal funds lines

with no borrowings outstanding.

The following table presents additional information about our contractual obligations

as of December 31, 2023, which by

their terms had contractual maturity and termination dates subsequent to December

31, 2023:

Payments due by period

1 year

1 to 3

3 to 5

More than

(Dollars in thousands)

Total

or less

years

5 years

Contractual obligations:

Deposit maturities (1)

896,243

864,461

16,866

14,916

—

Operating lease obligations

551

123

210

177

Total

896,794

864,584

17,076

15,093

(1) Deposits with no stated maturity (demand, NOW, money market, and savings deposits) are

presented in the "1 year or less" column

Management believes that the Company and the Bank have adequate sources of liquidity

to meet all known contractual

obligations and unfunded commitments, including loan commitments and reasonable

borrower, depositor,

and creditor

requirements over the next 12 months.

Off-Balance Sheet Arrangements

At December 31, 2023, the Bank had outstanding standby letters of credit of $0.6

million and unfunded loan commitments

outstanding of $73.6 million. Because these commitments generally

have fixed expiration dates and many will expire

without being drawn upon, the total commitment level does not necessarily represent

future cash requirements. If needed to

fund these outstanding commitments, the Bank has the ability to liquidate federal funds sold

obtain FHLB-Atlanta

advances, raise deposits,

sell securities available-for-sale, or purchase federal funds from other financial

institutions on a

short-term basis while it obtains the other longer-term funding.

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Residential mortgage lending and servicing activities

We primarily sell conforming

residential mortgage loans in the secondary market to Fannie Mae

while retaining the

servicing of these loans (MSRs). The sale agreements for these residential mortgage

loans with Fannie Mae and other

investors include various representations and warranties regarding the origination

and characteristics of the residential

mortgage loans. Although the representations and warranties vary among investors,

they typically cover ownership of the

loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing

the loan,

compliance with loan criteria set forth in the applicable agreement, compliance with applicable

federal, state, and local

laws, among other matters.

The Bank sells mortgage loans to Fannie Mae and services these on an actual/actual basis.

As a result, the Bank is not

obligated to make any advances to Fannie Mae on principal and interest on such mortgage

loans where the borrower is

entitled to forbearance.

As of December 31, 2023, the unpaid principal balance of residential mortgage loans,

which we have originated and sold,

but retained the servicing rights (MSRs) totaled $215.5 million. Although these loans

are generally sold on a non-recourse

basis, except for breaches of customary seller representations and warranties,

we may have to repurchase residential

mortgage loans in cases where we breach such representations or

warranties or the other terms of the sale, such as where we

fail to deliver required documents or the documents we deliver are defective. Investors

also may require the repurchase of a

mortgage loan when an early payment default underwriting review reveals significant

underwriting deficiencies, even if the

mortgage loan has subsequently been brought current. Repurchase demands are typically reviewed

on an individual loan by

loan basis to validate the claims made by the investor and to determine if a contractually

required repurchase event has

occurred. We

seek to reduce and manage the risks of potential repurchases or other claims by mortgage loan investors

through our underwriting, quality assurance and servicing practices, including

good communications with our residential

mortgage investors.

We service all residential

mortgage loans originated and sold by us to Fannie Mae. As servicer,

our primary duties are to:

(1) collect payments due from borrowers; (2) advance certain delinquent payments

of principal and interest; (3) maintain

and administer any hazard, title, or primary mortgage insurance policies relating to the

mortgage loans; (4) maintain any

required escrow accounts for payment of taxes and insurance and administer escrow payments;

and (5) foreclose on

defaulted mortgage loans or take other actions to mitigate the potential losses to investors

consistent with the agreements

governing our rights and duties as servicer.

The agreement under which we act as servicer generally specifies our

standards of responsibility for actions taken by us in

such capacity and provides protection against expenses and liabilities incurred by us

when acting in compliance with the

respective servicing agreements. However, if

we commit a material breach of our obligations as servicer,

we may be subject

to termination if the breach is not cured within a specified period following notice. The

standards governing servicing and

the possible remedies for violations of such standards are determined by servicing

guides issued by Fannie Mae as well as

the contract provisions established between Fannie Mae and the Bank.

Remedies could include repurchase of an affected

loan.

Although to date repurchase requests related to representation and warranty provisions,

and servicing activities have been

limited, it is possible that requests to repurchase mortgage loans may increase in frequency

if investors more aggressively

pursue all means of recovering losses on their purchased loans. As of December

31, 2023, we believe that this exposure is

not material due to the historical level of repurchase requests and loss trends, the results of

our quality control reviews, and

the fact that 99% of our residential mortgage loans serviced for Fannie Mae

were current as of such date. We

maintain

ongoing communications with our investors and will continue to evaluate this exposure

by monitoring the level and number

of repurchase requests as well as the delinquency rates in our investor portfolios.

The Company was not required to repurchase any loans during 2023 and 2022 as a result of representation

and warranty

provisions contained in the Company’s sale agreements

with Fannie Mae, and had no pending repurchase or make-whole

requests at December 31, 2023.

Table of Contents

Effects of Inflation and Changing Prices

The consolidated financial statements and related consolidated financial data presented

herein have been prepared in

accordance with GAAP and practices within the banking industry which require

the measurement of financial position and

operating results in terms of historical dollars without considering the changes

in the relative purchasing power of money

over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities

of a financial institution

are monetary in nature. As a result, interest rates have a more significant impact on a

financial institution’s performance

than the effects of general levels of inflation.

Inflation can affect our noninterest expenses. It also can affect

our customers’ behaviors, and can affect the interest rates we

have to pay on our deposits and other borrowings, and the interest rates we earn on our earning

assets. The difference

between our interest expense and interest income is also affected by the shape

of the yield curve and the speeds at which

our assets and liabilities, respectively,

reprice in response to interest rate changes. The yield curve was inverted on

December 31, 2023, which means shorter term interest rates are higher than longer

interest rates. This results in a lower

spread between our costs of funds and our interest income. In addition, net interest income

could be affected by

asymmetrical changes in the different interest rate indexes, given that

not all our assets or liabilities are priced with the

same index. Higher market interest rates and sales or maturities of securities held by the

Federal Reserve to reduce inflation

generally reduce economic activity and may reduce loan demand and growth. Inflation

and related changes in market

interest rates, as the Federal Reserve acts to meet its long term inflation goal of 2%, also

can adversely affect the values and

liquidity of our loans and securities, the value of collateral for our loans, and the success of

our borrowers and such

borrowers’ available cash to pay interest on and principal of our loans to them.

Inflation is running at levels unseen in decades and, while it has declined during 2023,

it remains above the Federal

Reserve’s long term inflation goal of 2% annually.

Beginning in March 2022, the Federal Reserve has been raising target

federal funds interest rates and reducing its securities holdings in an effort

to reduce inflation. During 2022, the Federal

Reserve increased the target federal funds range from 0 – 0.25%

to 4.25 – 4.50%. The target federal funds rate was

increased another 25 basis points on each of January 31, March 7, May 3 and July 26, 2023

to 5.25-5.50%, and further

increases in the target federal funds rate may be made if inflation remains elevated.

The Federal Reserve has indicated it

will maintain higher target rates and restrictive monetary policy to

meet its 2% inflation rate over the longer term and

maximum employment goals. Our deposit costs may increase as the Federal

Reserve increases its target federal funds rate,

market interest rates increase, and as customer savings behaviors change as a result of inflation

and customers seek higher

market interest rates on deposits and other alternative investments. Monetary efforts

to control inflation pursuant to the

Federal Act’s mandate to “promote effectively

the goals of maximum employment, stable prices, and moderate long-term

interest rates,” may also affect unemployment which is an important component

in our CECL model used to estimate our

allowance for credit losses.

CURRENT ACCOUNTING DEVELOPMENTS

The following ASU has been issued by the FASB

but is not yet effective.

●

ASU 2023-02,

Investments – Equity Method and Joint Ventures

(Topic 323):

Accounting for Investments in Tax

Credit Structures Using

the Proportional Amortization Method;

and

●

ASU 2023-09,

Income Taxes

(Topic 740):

Improvements to Income Tax

Disclosures.

Information about this pronouncement is described in more detail below.

ASU 2023-02,

Investments – Equity Method and Joint Ventures

(Topic 323):

Accounting for Investments in Tax

Credit

Structures Using the Proportional

Amortization Method

, The amendments in this Update permit reporting entities to elect

to account for their tax equity investments, regardless of the tax credit program from

which the income tax credits are

received, using the proportional amortization method if certain conditions are

met. The new standard is effective for fiscal

years, and interim periods within those fiscal years, beginning after December

15, 2023. The Company does not expect the

new standard to have a material impact on the Company’s

consolidated financial statements.

ASU 2023-09,

Income Taxes

(Topic 740):

Improvements to Income Tax

Disclosures

, The amendments in this Update

enhance the transparency and decision usefulness of income tax disclosures.

For public business entities, the new standard

is effective for annual periods beginning after December 15, 2024.

The Company does not expect the new standard to have

a material impact on the Company’s consolid

ated financial statements.

Table of Contents

Table 1

– Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with GAAP,

this annual report on Form 10-K includes certain designated net

interest income amounts presented on a tax-equivalent basis, a non-GAAP financial

measure, including the presentation of

total revenue and the calculation of the efficiency ratio.

The Company believes the presentation of net interest income on a tax-equivalent

basis provides comparability of net

interest income from both taxable and tax-exempt sources and facilitates comparability

within the industry. Although the

Company believes these non-GAAP financial measures enhance investors’

understanding of its business and performance,

these non-GAAP financial measures should not be considered an alternative to

GAAP.

The reconciliation of these non-

GAAP financial measures from GAAP to non-GAAP is presented below.

Year ended December 31

(In thousands)

2023

2022

2021

2020

2019

Net interest income (GAAP)

26,328

27,166

23,990

24,338

26,064

Tax-equivalent adjustment

417

456

470

492

557

Net interest income (Tax-equivalent)

26,745

27,622

24,460

24,830

26,621

Table of Contents

Table 2

- Selected Financial Data

Year ended December 31

(Dollars in thousands, except per share amounts)

2023

2022

2021

2020

2019

Income statement

Tax-equivalent interest income (a)

34,791

30,001

26,977

28,686

30,804

Total interest expense

8,046

2,379

2,517

3,856

4,183

Tax equivalent net interest income (a)

26,745

27,622

24,460

24,830

26,621

Provision for credit losses

135

1,000

(600)

1,100

(250)

Total noninterest income

(2,981)

6,506

4,288

5,375

5,494

Total noninterest expense

22,594

19,823

19,433

19,554

19,697

Net earnings before income taxes and

tax-equivalent adjustment

1,035

13,305

9,915

9,551

12,668

Tax-equivalent adjustment

417

456

470

492

557

Income tax expense

(777)

2,503

1,406

1,605

2,370

Net earnings

1,395

10,346

8,039

7,454

9,741

Per share data:

Basic and diluted net earnings

0.40

2.95

2.27

2.09

2.72

Cash dividends declared

1.08

1.06

1.04

1.02

1.00

Weighted average shares outstanding

Basic and diluted

3,498,030

3,510,869

3,545,310

3,566,207

3,581,476

Shares outstanding

3,493,614

3,503,452

3,520,485

3,566,276

3,566,146

Stockholders' equity (book value)

21.90

19.42

29.46

30.20

27.57

Common stock price

High

24.50

34.49

48.00

63.40

53.90

Low

18.80

22.07

31.32

24.11

30.61

Period-end

21.28

23.00

32.30

42.29

53.00

To earnings ratio

53.20

7.80

14.23

20.23

19.49

To book value

118

110

140

192

Performance ratios:

Return on average equity

2.05

12.48

7.54

7.12

10.35

Return on average assets

0.14

0.96

0.78

0.83

1.18

Dividend payout ratio

270.00

35.93

45.81

48.80

36.76

Average equity to average assets

6.66

7.72

10.39

11.63

11.39

Asset Quality:

Allowance for credit losses as a % of:

Loans

1.23

1.14

1.08

1.22

0.95

Nonperforming loans

753

211

1,112

1,052

2,345

Nonperforming assets as a % of:

Loans and other real estate owned

0.16

0.54

0.18

0.12

0.04

Total assets

0.09

0.27

0.07

0.06

0.02

Nonperforming loans as % of loans

0.16

0.54

0.10

0.12

0.04

Net charge-offs (recoveries) as a % of average loans

0.01

0.04

0.02

(0.03)

0.03

Capital Adequacy (c):

CET 1 risk-based capital ratio

14.52

15.39

16.23

17.27

17.28

Tier 1 risk-based capital ratio

14.52

15.39

16.23

17.27

17.28

Total risk-based capital ratio

15.52

16.25

17.06

18.31

18.12

Tier 1 leverage ratio

9.72

10.01

9.35

10.32

11.23

Other financial data:

Net interest margin (a)

2.89

2.81

2.55

2.92

3.43

Effective income tax rate

(125.73)

19.48

14.89

17.72

19.57

Efficiency ratio (b)

95.08

58.08

67.60

64.74

61.33

Selected period end balances:

Securities

270,910

405,304

421,891

335,177

235,902

Loans, net of unearned income

557,294

504,458

458,364

461,700

460,901

Allowance for credit losses

6,863

5,765

4,939

5,618

4,386

Total assets

975,255

1,023,888

1,105,150

956,597

828,570

Total deposits

896,243

950,337

994,243

839,792

724,152

Total stockholders’ equity

76,507

68,041

103,726

107,689

98,328

(a) Tax-equivalent.

See "Table 1 - Explanation of Non-GAAP Financial Measures".

(b) Efficiency ratio is the result of noninterest expense divided

by the sum of noninterest income and tax-equivalent net interest

income.

wholly-owned subsidiary, AuburnBank.

Table of Contents

Table 3

- Average Balance

and Net Interest Income Analysis

Year ended December 31

2023

2022

Interest

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)

Balance

Expense

Rate

Balance

Expense

Rate

Interest-earning assets:

Loans and loans held for sale (1)

523,838

24,925

4.76%

454,604

20,241

4.45%

Securities - taxable

335,366

7,208

2.15%

364,006

6,576

1.81%

Securities - tax-exempt (2)

52,122

1,985

3.81%

61,614

2,172

3.53%

Total securities

387,488

9,193

2.37%

425,620

8,748

2.06%

Federal funds sold

5,221

250

4.79%

43,766

435

1.00%

Interest bearing bank deposits

8,593

423

4.92%

58,141

577

0.99%

Total interest-earning assets

925,140

34,791

3.76%

982,131

30,001

3.05%

Cash and due from banks

15,230

15,108

Other assets

81,438

77,496

Total assets

1,021,808

1,074,735

Interest-bearing liabilities:

Deposits:

NOW

193,451

1,907

0.99%

197,177

370

0.19%

Savings and money market

289,235

2,132

0.74%

327,139

649

0.20%

Certificates of deposits

175,085

3,935

2.25%

154,273

1,300

0.84%

Total interest-bearing deposits

657,771

7,974

1.21%

678,589

2,319

0.34%

Short-term borrowings

3,255

2.21%

4,516

1.33%

Total interest-bearing liabilities

661,026

8,046

1.22%

683,105

2,379

0.35%

Noninterest-bearing deposits

289,019

306,772

Other liabilities

3,697

1,933

Stockholders' equity

68,066

82,925

Total liabilities and

and stockholders' equity

1,021,808

1,074,735

Net interest income and margin

26,745

2.89%

27,622

2.81%

(1) Average loan balances are

shown net of unearned income and loans on nonaccrual status have been included

in the computation of average balances.

(2) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using an income tax rate

of 21%.

Table of Contents

Table 4

- Volume and

Rate Variance

Analysis

Year ended December 31, 2023 vs. 2022

Year ended December 31, 2022 vs. 2021

Net

Due to change in

Net

Due to change in

(Dollars in thousands)

Change

Rate (2)

Volume (2)

Change

Rate (2)

Volume (2)

Interest income:

Loans and loans held for sale

4,684

1,390

3,294

(232)

(5)

(227)

Securities - taxable

632

1,247

(615)

2,469

1,687

782

Securities - tax-exempt (1)

(187)

174

(361)

(70)

(30)

(40)

Total securities

445

1,421

(976)

2,399

1,657

742

Federal funds sold

(185)

1,661

(1,846)

380

329

Interest bearing bank deposits

(154)

2,285

(2,439)

477

666

(189)

Total interest income

4,790

6,757

(1,967)

3,024

2,647

377

Interest expense:

Deposits:

NOW

1,537

1,574

(37)

158

122

Savings and money market

1,483

1,762

(279)

(6)

(66)

Certificates of deposits

2,635

2,167

468

(333)

(292)

(41)

Total interest-bearing deposits

5,655

5,503

152

(181)

(236)

Short-term borrowings

(28)

Total interest expense

5,667

5,543

124

(138)

(228)

Net interest income

(877)

1,214

(2,091)

3,162

2,875

287

(1) Yields on tax-exempt securities have been

computed on a tax-equivalent basis using an income

tax rate of 21%.

(2) Changes that are not solely a result of volume or rate have been allocated to volume.

Table of Contents

Table 5

- Net Charge-Offs (Recoveries) to Average

Loans

2023

2022

Net

(recovery)

Net

charge-off

(recoveries)

Average

charge-off

charge-offs

Average

(recovery)

(Dollars in thousands)

charge-off

Loans (2)

ratio

(recoveries)

Loans (2)

ratio

Commercial and industrial (1)

(40)

64,565

(0.06)

215

69,973

0.31

Construction and land development

—

66,492

—

44,177

—

Commercial real estate

—

274,779

—

(23)

247,374

(0.01)

Residential real estate

(14)

108,891

(0.01)

(26)

85,223

(0.03)

Consumer installment

100

9,638

1.04

7,915

0.10

Total

524,365

0.01

174

454,662

0.04

(1) Excludes PPP loans, which are guaranteed by the SBA.

(2) Gross loan balances.

Table of Contents

Table 6

- Loan Maturities

December 31, 2023

1 year

1 to 5

5 to 15

After 15

(Dollars in thousands)

or less

years

Total

Commercial and industrial

15,455

22,999

33,269

1,651

73,374

Construction and land development

37,684

27,105

3,540

—

68,329

Commercial real estate

23,139

111,988

148,200

3,980

287,307

Residential real estate

5,250

24,880

37,391

49,936

117,457

Consumer installment

4,159

5,536

1,132

—

10,827

Total loans

85,687

192,508

223,532

55,567

557,294

Table of Contents

Table 7

- Sensitivities to Changes in Interest Rates on Loans Maturing in More

Than One Year

December 31, 2023

Variable

Fixed

(Dollars in thousands)

Rate

Total

Commercial and industrial

57,835

57,919

Construction and land development

6,548

24,097

30,645

Commercial real estate

161

264,007

264,168

Residential real estate

49,561

62,646

112,207

Consumer installment

135

6,533

6,668

Total loans

56,489

415,118

471,607

Table of Contents

Table 8

- Allocation of Allowance for Credit Losses

2023

2022

(Dollars in thousands)

Amount

Commercial and industrial

1,288

13.2

747

13.1

Construction and land development

960

12.3

949

13.2

Commercial real estate

3,921

51.5

3,109

52.4

Residential real estate

546

21.1

828

19.4

Consumer installment

148

1.9

132

1.9

Total allowance for credit

losses

6,863

5,765

* Loan balance in each category expressed as a percentage of total loans.

Table of Contents

Table 9

- Estimated Uninsured Time Deposits by Maturity

(Dollars in thousands)

December 31, 2023

Maturity of:

3 months or less

12,503

Over 3 months through 6 months

21,940

Over 6 months through 12 months

50,384

Over 12 months

12,816

Total estimated uninsured

time deposits

97,643

Table of Contents

ITEM 7A.

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

The information called for by ITEM 7A is set forth in ITEM 7 under the caption

“Market and Liquidity Risk Management”

and is incorporated herein by reference.

ITEM 8.

FINANCIAL STATEMENTS

AND SUPPLEMENTARY

DATA

Index

Page

Report of Independent Registered Public Accounting Firm

(PCAOB ID:

149

)

Consolidated Balance Sheets

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

Auburn National Bancorporation, Inc. and Subsidiary

Opinion on the Financial Statements

have audited

the

accompanying consolidated

balance sheets

Auburn National

Bancorporation, Inc.

and

Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of earnings,

comprehensive income,

stockholders’ equity

and cash

flows

for the

years then

ended, and

the

related notes

the

consolidated

financial

statements

(collectively,

the

“financial

statements”).

our

opinion,

the

financial

statements

present

fairly,

all

material

respects,

the

financial

position

the

Company

December

31,

2023 and

2022, and the

results of its

operations and its

cash flows for

the years then

ended, in conformity

with

accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit

losses

effective

January

2023,

due

the

adoption

Financial

Accounting

Standards

Board

Accounting

Standards Codification

No. 326

, Financial

Instruments –

Credit

Losses (ASC

326).

The Company

adopted the

new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted

and

continue

reported

accordance

with

the

previously

applicable

generally

accepted

accounting

principles. The adoption of the new credit loss

standard and its subsequent applications is also communicated as

a critical audit matter below.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our

responsibility is to express

opinion

the

Company’s

financial

statements

based

our

audits.

are

public

accounting

firm

registered with

the Public Company Accounting

Oversight Board

(United States) (PCAOB) and

are required to

be independent

with respect to

the Company in

accordance with U.S.

federal securities laws

and the applicable

rules and regulations of the Securities and Exchange Commission and

the PCAOB.

conducted our audits in accordance

with the standards of

the PCAOB. Those standards

require that we plan

and perform the

audit to obtain reasonable

assurance about whether the

financial statements are free

of material

misstatement,

whether

due

error

fraud.

The

Company

not

required

have,

nor

were

engaged

perform, an audit

of its internal

control over financial

reporting. As part

of our audits

we are

required to obtain

an understanding of internal control over financial

reporting but not for the

purpose of expressing an opinion on

the

effectiveness of

the

Company’s

internal control

over financial

reporting. Accordingly,

we express

no such

opinion.

Our

audits

included

performing

procedures

assess

the

risks

material

misstatement

the

financial

statements,

whether

due

error

fraud,

and

performing

procedures

that

respond

those

risks.

Such

procedures included examining, on

a test basis,

evidence regarding the

amounts and disclosures

in the financial

statements. Our audits also included evaluating the accounting principles used and significant estimates made by

management,

well

evaluating

the

overall

presentation

the

financial

statements.

believe

that

our

audits provide a reasonable basis for our opinion.

Table of Contents

Critical Audit Matters

The critical audit

matters communicated below are

matters arising from the

current period audit

of the financial

statements that

were communicated

or required

to be

communicated to

the audit

committee and

that: (1)

relate

accounts

disclosures

that

are

material

the

financial

statements

and

(2)

involved

our

especially

challenging, subjective or complex judgments. The communication of critical audit

matters does not alter in any

way our

opinion on

the financial

statements, taken

as a

whole, and

are not,

by communicating

the critical

audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to

which they relate.

Allowance for Credit Losses

described

Note

the

Company’s

consolidated

financial

statements,

the

Company

has

gross

loan

portfolio of $557.3

million and related

allowance for credit

losses of $6.9

million as of

December 31, 2023. As

described by the Company in Note

1, the allowance for credit

losses is estimated by management using relevant

available

information, from

both

internal and

external sources,

relating

past

events,

current

conditions, and

reasonable and

supportable forecasts. The

Company’s credit

loss assumptions

are estimated

using a

discounted

cash flow

("DCF") model

for each

loan segment,

except consumer

loans. The

weighted average

remaining life

method is

used to

estimate credit loss

assumptions for consumer

loans. The

DCF model

calculates an

expected

life-of-loan

loss

percentage

considering

the

forecasted

probability that

borrower

will

default

(the

“PD”),

adjusted for

relevant forecasted

macroeconomic factors,

and loss

given default

(“LGD”), which

is the

estimate

the

amount

net

loss

the

event

default.

This

model

utilizes

historical

correlations

between

default

experience

and

certain

macroeconomic

factors

determined

through

statistical

regression

analysis.

Projections of

macroeconomic factors

are obtained

from an

independent

third party

and

are utilized

predict

quarterly rates

of default

based on

the statistical

PD models. The

weighted average remaining

life method

uses

an annual

charge-off

rate over

several vintages

to estimate

credit losses.

Additionally,

the allowance

for credit

losses

calculation

includes

subjective

adjustments

for

qualitative

risk

factors

that

are

believed

likely

cause

estimated credit losses to differ from historical experience.

identified the Company’s

estimate of the

allowance for credit losses

(“ACL”) as a critical

audit matter.

The

principal considerations for our

determination of the allowance for

credit losses as a

critical audit matter related

the

high degree

subjectivity in

the

Company’s

judgments

determining the

macroeconomic data

in the

reasonable and

supportable forecasts,

as well

as the

qualitative factors.

Auditing these

complex judgments

and

assumptions by

the Company

involves especially

challenging auditor

judgment due

to the

nature and

extent of

audit

evidence

and

effort

required

address

these

matters,

including

the

extent

specialized

skill

knowledge needed.

The primary procedures we performed to address this critical audit matter

included the following:

●

obtained

understanding

the

Company’s

process

for

establishing

the

ACL,

including

the

selection

and

application

forecasts

and

the

basis

for

development

and

adjustments

the

qualitative factor components of the ACL.

●

evaluated

the

design

and

tested

the

operating

effectiveness

controls

relating

management’s

determination of the ACL, including controls over:

Management’s

process

for

selection

forecasts

and

the

basis

for

development

qualitative

factors of the ACL.

Management’s

review

reliability

and

accuracy

data

used

calculate

and

estimate

the

various

components

the

ACL,

including

accuracy

the

calculation

and

validation

procedures.

Management’s process

to review the

reasonableness of the forecasts

and the qualitative

factors,

including any adjustments.

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●

evaluated the

reasonableness of

management’s

application of

qualitative factor

adjustments to

the

ACL, including

the comparison

of factors

considered by

management to

third party

or internal

sources

as well as evaluated the appropriateness and level of the qualitative factor adjustments.

●

assessed

the

overall

trends

credit

quality,

including

adjustments

for

the

qualitative

factors

comparing the overall allowance for credit losses to those recorded by

the Company’s peer institutions.

●

evaluated

subsequent

events

and

transactions

and

considered

whether

they

corroborated

contradicted the Company’s conclusion.

/s/

Elliott Davis, LLC

We have served as the Company's auditor since 2015.

Greenville, South Carolina

March 14, 2024

Table of Contents

AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31

(Dollars in thousands, except share data)

2023

2022

Assets:

Cash and due from banks

27,127

11,608

Federal funds sold

31,412

9,300

Interest bearing bank deposits

12,830

6,346

Cash and cash equivalents

71,369

27,254

Securities available-for-sale

270,910

405,304

Loans, net of unearned income

557,294

504,458

Allowance for credit losses

(6,863)

(5,765)

Loans, net

550,431

498,693

Premises and equipment, net

45,535

46,575

Bank-owned life insurance

17,110

19,952

Other assets

19,900

26,110

Total assets

975,255

1,023,888

Liabilities:

Deposits:

Noninterest-bearing

270,723

311,371

Interest-bearing

625,520

638,966

Total deposits

896,243

950,337

Federal funds purchased and securities sold under agreements to repurchase

1,486

2,551

Accrued expenses and other liabilities

1,019

2,959

Total liabilities

898,748

955,847

Stockholders' equity:

Preferred stock of $

0.01

par value; authorized

200,000

shares;

issued shares - none

—

Common stock of $

0.01

par value; authorized

8,500,000

shares;

issued

3,957,135

Additional paid-in capital

3,801

3,797

Retained earnings

113,398

116,600

Accumulated other comprehensive loss, net

(29,029)

(40,920)

Less treasury stock, at cost -

463,521

shares and

453,683

at December 31, 2023 and 2022, respectively

(11,702)

(11,475)

Total stockholders’ equity

76,507

68,041

Total liabilities and stockholders’

equity

975,255

1,023,888

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

Year ended December 31

(Dollars in thousands, except share and per share data)

2023

2022

Interest income:

Loans, including fees

24,925

20,241

Securities:

Taxable

7,208

6,576

Tax-exempt

1,568

1,716

Federal funds sold and interest bearing bank deposits

673

1,012

Total interest income

34,374

29,545

Interest expense:

Deposits

7,974

2,319

Short-term borrowings

Total interest expense

8,046

2,379

Net interest income

26,328

27,166

Provision for credit losses

135

1,000

Net interest income after provision for credit

losses

26,193

26,166

Noninterest income:

Service charges on deposit accounts

603

598

Mortgage lending

430

650

Bank-owned life insurance

411

317

Gain on sale of premises and equipment

—

3,234

Other

1,870

1,695

Securities (losses) gains, net

(6,295)

Total noninterest income

(2,981)

6,506

Noninterest expense:

Salaries and benefits

12,101

12,307

Employee retention credit

—

(1,569)

Net occupancy and equipment

2,954

2,742

Professional fees

1,299

975

FDIC and other regulatory assessments

631

404

Other

5,609

4,964

Total noninterest expense

22,594

19,823

Earnings before income taxes

618

12,849

Income tax (benefit) expense

(777)

2,503

Net earnings

1,395

10,346

Net earnings per share:

Basic and diluted

0.40

2.95

Weighted average shares

outstanding:

Basic and diluted

3,498,030

3,510,869

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Year ended December 31

(Dollars in thousands)

2023

2022

Net earnings

1,395

10,346

Other comprehensive gain (loss), net of tax:

Unrealized net holding gain (loss) on securities

7,177

(41,802)

Reclassification adjustment for net loss (gain) on securities

recognized in net earnings

4,714

(9)

Other comprehensive income (loss)

11,891

(41,811)

Comprehensive income (loss)

13,286

(31,465)

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Accumulated

Common

Additional

other

Common

paid-in

Retained

comprehensive

Treasury

(Dollars in thousands, except share data)

Outstanding

Stock

capital

earnings

(loss) income

stock

Total

Balance, December 31, 2021

3,520,485

3,794

109,974

891

(10,972)

103,726

Net earnings

—

10,346

—

10,346

Other comprehensive loss

—

(41,811)

—

(41,811)

Cash dividends paid ($

1.06

per share)

—

(3,720)

—

(3,720)

Stock repurchases

(17,183)

—

(504)

Sale of treasury stock

150

—

Balance, December 31, 2022

3,503,452

3,797

116,600

(40,920)

(11,475)

68,041

Cumulative effect of change in

accounting standard

—

(821)

—

(821)

Net earnings

—

1,395

—

1,395

Other comprehensive income

—

11,891

—

11,891

Cash dividends paid ($

1.08

per share)

—

(3,776)

—

(3,776)

Stock repurchases

(10,108)

—

(229)

Sale of treasury stock

270

—

Balance, December 31, 2023

3,493,614

3,801

113,398

(29,029)

(11,702)

76,507

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year ended December 31

(In thousands)

2023

2022

Cash flows from operating activities:

Net earnings

1,395

10,346

Adjustments to reconcile net earnings to net cash provided by

operating activities:

Provision for credit losses

135

1,000

Depreciation and amortization

1,700

1,528

Premium amortization and discount accretion, net

2,380

3,091

Deferred tax (benefit) expense

(195)

686

Net loss (gain) on securities available for sale

6,295

(12)

Net gain on sale of loans held for sale

(71)

(309)

Net gain on other real estate owned

—

(162)

Loans originated for sale

(4,141)

(8,850)

Proceeds from sale of loans

4,174

10,424

Net loss (gain) on disposition of premises and equipment

—

(3,234)

Decrease (increase) in cash surrender value of bank owned life insurance

(359)

(317)

Income recognized from death benefit on bank-owned life insurance

(52)

—

Net decrease (increase) in other assets

2,652

(2,441)

Net decrease in accrued expenses and other liabilities

(2,011)

(770)

Net cash provided by operating activities

11,902

10,980

Cash flows from investing activities:

Proceeds from sales of securities available-for-sale

111,269

4,860

Proceeds from maturities, paydowns and calls of securities available-for-sale

30,329

45,921

Purchase of securities available-for-sale

—

(93,106)

Increase in loans, net

(52,892)

(46,268)

Net purchases of premises and equipment

(418)

(7,049)

Increase in FHLB stock

(164)

(74)

Proceeds from bank-owned life insurance death benefit

216

—

Proceeds from surrender of bank-owned like insurance death benefit

3,037

—

Proceeds from sale of premises and equipment

—

4,222

Proceeds from sale of other real estate owned

—

536

Net cash provided by (used in) investing activities

91,377

(90,958)

Cash flows from financing activities:

Net decrease in noninterest-bearing deposits

(40,648)

(4,761)

Net decrease in interest-bearing deposits

(13,446)

(39,145)

Net decrease in federal funds purchased and securities sold

under agreements to repurchase

(1,065)

(897)

Stock repurchases

(229)

(504)

Dividends paid

(3,776)

(3,720)

Net cash used in financing activities

(59,164)

(49,027)

Net change in cash and cash equivalents

44,115

(129,005)

Cash and cash equivalents at beginning of period

27,254

156,259

Cash and cash equivalents at end of period

71,369

27,254

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

7,516

2,341

Income taxes

1,230

1,351

See accompanying notes to consolidated financial statements

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AUBURN NATIONAL

BANCORPORATION,

INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES

Nature of Business

Auburn National Bancorporation, Inc. (the “Company”) is a bank holding company

whose primary business is conducted

by its wholly-owned subsidiary,

AuburnBank (the “Bank”). AuburnBank is a commercial bank located in Auburn,

Alabama. The Bank provides a full range of banking services in its primary market area,

Lee County, which includes the

Auburn-Opelika Metropolitan Statistical Area.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and

its wholly-owned subsidiaries, which are

managed as a single business segment. Significant intercompany transactions and

accounts are eliminated in consolidation.

Revenue Recognition

The Company’s sources of income that fall

within the scope of ASC 606 include service charges on deposits, investment

services, interchange fees and gains and losses on sales of other real estate, all of which are

presented as components of

noninterest income. The following is a summary of the revenue streams that fall

within the scope of ASC 606:

Service charges on deposits, investment services, ATM

and interchange fees – Fees from these services are either

transaction-based, for which the performance obligations are satisfied

when the individual transaction is processed, or set

periodic service charges, for which the performance obligations

are satisfied over the period the service is provided.

Transaction-based fees are recognized at the time the transaction

is processed, and periodic service charges are recognized

over the service period.

Gains on sales of other real estate

–

A gain on sale should be recognized when a contract for sale exists and control of the

asset has been transferred to the buyer.

ASC 606 lists several criteria required to conclude that a contract for sale exists,

including a determination that the institution will collect substantially all of the consideration

to which it is entitled. In

addition to the loan-to-value, the analysis is based on various other factors, including the credit

quality of the borrower, the

structure of the loan, and any other factors that may affect collectability.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted

accounting principles requires

management to make estimates and assumptions that affect the reported

amounts of assets and liabilities and the disclosure

of contingent assets and liabilities as of the balance sheet date and the reported

amounts of income and expense during the

reporting period. Actual results could differ from those estimates. Material estimates

that are particularly susceptible to

significant change in the near term include the determination of the allowance

for credit losses, fair value measurements,

valuation of other real estate owned, and valuation of deferred tax assets.

Reclassifications

Certain amounts reported in the prior period have been reclassified to conform to the current

-period presentation. These

reclassifications had no impact on the Company’s

previously reported net earnings or total stockholders’ equity.

Subsequent Events

The Company has evaluated the effects of events or transactions through

the date of this filing that have occurred

subsequent to December 31, 2023. The Company does not believe there are

any material subsequent events that would

require further recognition or disclosure.

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Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit

Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASC 326). This standard

replaced the incurred loss methodology

with an expected loss methodology that is referred to as the current expected credit loss (“CECL”)

methodology. CECL

requires an estimate of credit losses for the remaining estimated life of the financial asset using

historical experience,

current conditions, and reasonable and supportable forecasts and generally applies to

financial assets measured at amortized

cost, including loan receivables and held-to-maturity debt securities, and some off

-balance sheet credit exposures such as

unfunded commitments to extend credit. Financial assets measured at amortized

cost will be presented at the net amount

expected to be collected by using an allowance for credit losses.

In addition, CECL made changes to the accounting for available for sale debt

securities. One such change is to require

credit losses to be presented as an allowance rather than as a write-down on available for sale debt

securities if management

does not intend to sell and does not believe that it is more likely than not, they will be required

to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto

effective January 1, 2023 using the

modified retrospective approach for all financial assets measured at amortized

cost and off-balance sheet credit

exposures.The transition adjustment upon the adoption of CECL on January 1, 2023

included an increase in the allowance

for credit losses on loans of $

1.0

million, which is presented as a reduction to net loans outstanding, and an increase in the

allowance for credit losses on unfunded loan commitments of $

0.1

million, which is recorded within other liabilities. The

Company recorded a net decrease to retained earnings of $

0.8

million as of January 1, 2023 for the cumulative effect of

adopting CECL, which reflects the transition adjustments noted above, net of the applicable

deferred tax assets recorded.

Results for reporting periods beginning after January 1, 2023 are presented under CECL

while prior period amounts

continue to be reported in accordance with previously applicable accounting

standards.

The Company adopted ASC 326 using the prospective transition approach for debt

securities for which other-than-

temporary impairment had been recognized prior to January 1, 2023.

As of December 31, 2022, the Company did not have

any other-than-temporarily impaired investment securities. Therefore,

upon adoption of ASC 326, the Company determined

that an allowance for credit losses on available for sale securities was not deemed

material.

The Company elected not to measure an allowance for credit losses for accrued interest recei

vable and instead elected to

reverse interest income on loans or securities that are placed on nonaccrual status,

which is generally when the instrument is

90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company

has concluded that

this policy results in the timely reversal of uncollectible interest.

The Company also adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic

326): Troubled Debt

Restructurings and Vintage Disclosures”

on January 1, 2023, the effective date of the guidance, on a prospective basis.

ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure

requirements for certain loan

refinancings and restructurings by creditors when a borrower is experiencing

financial difficulty.

Specifically, rather than

applying the recognition and measurement guidance for TDRs, an entity

must apply the loan refinancing and restructuring

guidance to determine whether a modification results in a new loan or a

continuation of an existing loan.

Additionally,

ASU 2022-02 requires an entity to disclose current-period gross write-offs

by year of origination for financing receivables

within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured

at Amortized Cost. ASU 2022-02

did not have a material impact on the Company’s

consolidated financial statements.

Issued not yet effective accounting standards

ASU 2023-02,

Investments – Equity Method and Joint Ventures

(Topic 323):

Accounting for Investments in Tax

Credit

Structures Using the Proportional

Amortization Method

, The amendments in this Update permit reporting entities to elect

to account for their tax equity investments, regardless of the tax credit program from

which the income tax credits are

received, using the proportional amortization method if certain conditions are

met. The new standard is effective for fiscal

years, and interim periods within those fiscal years, beginning after December

15, 2023. The Company does not expect the

new standard to have a material impact on the Company’s

consolidated financial statements.

ASU 2023-09,

Income Taxes

(Topic 740):

Improvements to Income Tax

Disclosures

, The amendments in this Update

enhance the transparency and decision usefulness of income tax disclosures.

For public business entities, the new standard

is effective for annual periods beginning after December 15, 2024.

The Company does not expect the new standard to have

a material impact on the Company’s consolidated

financial statements.

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Cash Equivalents

Cash equivalents include cash on hand, cash items in process of collection, amounts due

from banks, including interest

bearing deposits with other banks, and federal funds sold.

Securities

Securities are classified based on management’s

intention at the date of purchase. At December 31, 2023, all of the

Company’s securities were classified

as available-for-sale. Securities available-for-sale are

used as part of the Company’s

interest rate risk and liquidity management strategy,

and they may be sold in response to changes in interest rates, changes

in prepayment risks or other factors. All securities classified as available-for-sale

are recorded at fair value with any

unrealized gains and losses reported in accumulated other comprehensive income (loss),

net of the deferred income tax

effects. Interest and dividends on securities, including the amortization

of premiums and accretion of discounts are

recognized in interest income using the effective interest method.

Premiums are amortized to the earliest call date while

discounts are accreted over the estimated life of the security.

Realized gains and losses from the sale of securities are

determined using the specific identification method.

For any securities classified as available-for-sale that are in an unrealized

loss position at the balance sheet date, the

Company assesses whether or not it intends to sell the security,

or more likely than not will be required to sell the security,

before recovery of its amortized cost basis. If either of these criteria are met, the security's

amortized cost basis is written

down to fair value through net income. If neither criterion is met, the Company evaluates

whether any portion of the decline

in fair value is the result of credit deterioration. Such evaluations consider the extent to

which the amortized cost of the

security exceeds its fair value, changes in credit ratings and any other known adverse conditions

related to the specific

security. If the evaluation indicates

that a credit loss exists, an allowance for credit losses is recorded

for the amount by

which the amortized cost basis of the security exceeds the present value of cash flows expected

to be collected, limited by

the amount by which the amortized cost exceeds fair value. Any impairment not recognized

in the allowance for credit

losses is recognized in other comprehensive income.

Loans held for sale

The Company originates

residential mortgage loans for sale.

Such loans are carried at the lower of cost or estimated fair

value in the aggregate.

Loan sales are recognized when the transaction closes, the proceeds

are collected, and ownership is

transferred.

Continuing involvement, through the sales agreement, consists of the right to service the

loan for a fee for the

life of the loan, if applicable.

Gains on the sale of loans held for sale are recorded net of related costs, such as

commissions, and reflected as a component of mortgage lending income in the consolidated

statements of earnings.

The Bank makes various representations and warranties to the purchaser of the

residential mortgage loans they originated

and sells, primarily to Fannie Mae.

Every loan closed by the Bank’s mortgage center is run

through Fannie Mea or other

purchasing government sponsored enterprise (“GSE”) automated underwriting

system.

Any exceptions noted during this

process are remedied prior to sale.

These representations and warranties also apply to underwriting the real estate appraisal

opinion of value for the collateral securing these loans.

Failure by the Company to comply with the underwriting and/or

appraisal standards could result in the Company being required to repurchase the

mortgage loan or to reimburse the investor

for losses incurred (make whole requests) if the Company cannot cure such

failure within the specified period following

discovery.

Loans

Loans that management has the intent and ability to hold for the foreseeable

future or until maturity or payoff are reported

at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums

and discounts and

deferred fees and costs. Accrued interest receivable related to loans is recorded

in other assets on the consolidated balance

sheets. Interest income is accrued on the unpaid principal balance.

Loan origination fees, net of certain direct origination

costs, are deferred and recognized in interest income using methods that approximate

a level yield without anticipating

prepayments.

The accrual of interest is generally discontinued when a loan becomes 90 days past due and

is not well collateralized and in

the process of collection, or when management believes, after considering economic and

business conditions and collection

efforts, that the principal or interest will not be collectible in the normal

course of business. Past due status is based on

contractual terms of the loan. A loan is considered to be past due when a scheduled payment has

not been received 30 days

after the contractual due date.

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All accrued but unpaid interest is reversed against interest income when a loan is placed on nonaccrual

status. Interest

received on such loans is accounted for using the cost-recovery method,

until the loan qualifies for return to accrual.

Loans

are returned to accrual status when all the principal and interest amounts contractually due

are brought current, there is a

sustained period of repayment performance, and future payments are reasonably assured.

Otherwise, under the cost

recovery method, interest income is not recognized until the loan balance is reduced

to zero.

Allowance for Credit Losses – Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized

cost basis to present the net

amount expected to be collected on the loans.

Loans are charged off against the allowance when management

confirms the

loan balance is uncollectible.

Expected recoveries do not exceed the aggregate of amounts previously charged

-off and

expected to be charged-off.

Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s

estimate of lifetime credit losses inherent in loans as of the

balance sheet date. The allowance for credit losses is estimated by management using relevant

available information, from

both internal and external sources, relating to past events, current conditions, and reasonable and

supportable forecasts.

The Company’s loan loss estimation process includes

procedures to appropriately consider the unique characteristics of

its

respective loan segments (commercial and industrial, construction and land development,

commercial real estate,

residential real estate, and consumer loans).

These segments are further disaggregated into loan classes, the level at which

credit quality is monitored.

See Note 5, Loans and Allowance for Credit Losses, for additional information about our loan

portfolio.

Credit loss assumptions are estimated using a discounted cash flow ("DCF") model

for each loan segment, except consumer

loans.

The weighted average remaining life method is used to estimate credit loss assumptions

for consumer loans.

The DCF model calculates an expected life-of-loan loss percentage by considering the

forecasted probability that a

borrower will default (the “PD”), adjusted for relevant forecasted macroeconomic

factors, and loss given default (“LGD”),

which is the estimate of the amount of net loss in the event of default.

This model utilizes historical correlations between

default experience and certain macroeconomic factors as determined through

a statistical regression analysis.

The

forecasted Alabama unemployment rate is considered in the model for commercial

and industrial, construction and land

development, commercial real estate, and residential real estate loans.

In addition, forecasted changes in the Alabama

home price index is considered in the model for construction and land development and

residential real estate loans.

Forecasted changes in the national commercial real estate (“CRE”) price index is considered

in the model for commercial

real estate and multifamily loans; and forecasted changes in the Alabama

gross state product is considered in the model for

multifamily loans.

Projections of these macroeconomic factors, obtained from an independent

third party, are utilized to

predict quarterly rates of default based on the statistical PD models.

Expected credit losses are estimated over the contractual term of the loan, adjusted for

expected prepayments and principal

payments (“curtailments”) when appropriate. Management's determination of the

contract term excludes expected

extensions, renewals, and modifications unless the extension or

renewal option is included in the contract at the reporting

date and is not unconditionally cancellable by the Company.

To the extent the lives of the

loans in the portfolio extend

beyond the period for which a reasonable and supportable forecast can be

made (which is 4 quarters for the Company), the

Company reverts, on a straight-line basis back to the historical rates over an 8 quarter reversion

period.

The weighted average remaining life method was deemed most appropriate

for the consumer loan segment because

consumer loans contain many different payment structures,

payment streams and collateral.

The weighted average

remaining life method uses an annual charge-off rate over several vintages

to estimate credit losses.

The average annual

charge-off rate is applied to the contractual term adjusted for

prepayments.

Additionally, the allowance

for credit losses calculation includes subjective adjustments for qualitative risk

factors that are

believed likely to cause estimated credit losses to differ from historical experience.

These qualitative adjustments may

increase reserve levels and include adjustments for lending management experience and

risk tolerance, loan review and

audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations,

trends in underlying

collateral, external factors and economic conditions not already captured.

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Loans secured by real estate with balances equal to or greater than $500 thousand and loans

not secured by real estate with

balances equal to or greater than $250 thousand that do not share risk characteristics are

evaluated on an individual basis.

When management determines that foreclosure is probable and the borrower

is experiencing financial difficulty,

the

expected credit losses are based on the estimated fair value of collateral held at the reporting date,

adjusted for selling costs

as appropriate.

Allowance for Credit Losses – Unfunded Commitments

Financial instruments include off-balance sheet credit instruments,

such as commitments to make loans and commercial

letters of credit issued to meet customer financing needs. The Company’s

exposure to credit loss in the event of

nonperformance by the other party to the financial instrument for off-balance sheet

loan commitments is represented by the

contractual amount of those instruments. Such financial instruments are

recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet

credit exposures, unless the commitments to

extend credit are unconditionally cancelable, through a charge to provision

for credit losses in the Company’s consolidated

statements of earnings. The allowance for credit losses on off-balance sheet credit

exposures is estimated by loan segment

at each balance sheet date under the current expected credit loss model using the same

methodologies as portfolio loans,

taking into consideration the likelihood that funding will occur as well as any third-party

guarantees. The allowance for

unfunded commitments is included in other liabilities on the Company’s

consolidated balance sheets.

On January 1, 2023, the Company recorded an adjustment for unfunded commitments

of $77 thousand upon the adoption of

ASC 326.

At December 31, 2023, the liability for credit losses on off-balance-sheet credit

exposures included in other

liabilities was $

0.3

million.

Provision for Credit Losses

The composition of the provision for credit losses for the respective periods

is presented below.

Years ended December 31,

(Dollars in thousands)

2023

2022

Provision for credit losses:

Loans

125

1,000

Unfunded commitments (1)

Total provision for credit

losses

135

1,035

(1)

Reserve requirements for unfunded commitments were reported

as a component of other noninterest expense prior

to the adoption of ASC 326.

Premises and Equipment

Land is carried at cost. Land improvements, buildings and improvements, and furniture,

fixtures, and equipment are carried

at cost, less accumulated depreciation computed on a straight-line method over the estimated

useful lives of the assets or the

expected terms of the leases, if shorter.

Expected terms include lease option periods to the extent that the exercise of such

options is reasonably assured.

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Nonmarketable equity investments

Nonmarketable equity investments include equity securities that are not publicly traded

and securities acquired for various

purposes. The Bank is required to maintain certain minimum levels of equity investments

in (i) Federal Reserve Bank of

Atlanta based on the Bank’s capital stock and surplus,

and the (ii) Federal Home Bank of Atlanta (“FHLB – Atlanta”)

based on various factors including, the Bank’s

total assets, its borrowings and outstanding letters of credit from the FHLB

Atlanta and its “acquired member asset” sales to FHLB - Atlanta.

These nonmarketable equity securities are accounted for

at cost which equals par or redemption value. These securities do not have a readily determinable

fair value as their

ownership is restricted and there is no market for these securities. These securities can only

be redeemed or sold at their par

value by the respective issuer bank or, in the case of FHLB

– Atlanta stock upon FHLB – Atlanta approval sale to another

member of FHLB – Atlanta and law applicable to the member.

The Company records these nonmarketable equity securities

as a component of other assets, which are periodically evaluated for impairment. Management

considers these

nonmarketable equity securities to be long-term investments. Accordingly,

when evaluating these securities for impairment,

management considers the ultimate recoverability of the par value rather than by recognizing

temporary declines in value.

Transfers of Financial Assets

Transfers of an entire financial asset (i.e. loan sales), a group

of entire financial assets, or a participating interest in an entire

financial asset (i.e. loan participations sold) are accounted for as sales when control

over the assets have been surrendered.

Control over transferred assets is deemed to be surrendered when (1)

the assets have been isolated from the Company,

(2) the transferee obtains the right (free of conditions that constrain it from taking that right)

to pledge or exchange the

transferred assets, and (3) the Company does not maintain effective

control over the transferred assets through an

agreement to repurchase them before their maturity.

Mortgage Servicings Rights

The Company recognizes as assets the rights to service mortgage loans which it originates

and sells to others, principally

Fannie Mae.

These servicing rights are called “MSRs”.

The Company determines the fair value of MSRs on sold loans at

the date the loan is transferred.

An estimate of the Company’s MSRs is determined

using assumptions that market

participants would use in estimating future net servicing income, including estimates

of prepayment speeds, discount rate,

default rates, cost to service, escrow account earnings, contractual servicing

fee income, ancillary income, and late fees.

Subsequent to the date of sale of the residential mortgage loans, the Company has elected

to measure its MSRs on such sold

mortgage loans under the amortization method.

Under the amortization method, MSRs are amortized in proportion

to, and

over the period of, estimated net servicing income.

The amortization of MSRs is analyzed monthly and is adjusted to

reflect changes in prepayment speeds, as well as other factors.

MSRs are evaluated for impairment based on the fair value

of those assets.

Impairment is determined by stratifying MSRs into groupings based on predominant

risk characteristics,

such as interest rate and loan type.

If, by individual stratum, the carrying amount of the MSRs exceeds fair value,

valuation allowance is established through a charge to earnings.

The valuation allowance is adjusted as the fair value

changes.

MSRs are included in the other assets category in the accompanying consolidated

balance sheets at the lower of

cost or fair value.

See Note 14 “Fair Value”

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase generally mature less than one

year from the transaction date. Securities

sold under agreements to repurchase are reflected as a secured borrowing in the accompanying

consolidated balance sheets

at the amount of cash received in connection with each transaction.

Income Taxes

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences

between carrying

amounts and tax bases of assets and liabilities, computed using enacted tax rates. A

valuation allowance, if needed, reduces

deferred tax assets to the amount expected to be realized.

The net deferred tax asset is reflected as a component of other

assets in the accompanying consolidated balance sheets.

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Income tax expense or benefit for the year is allocated among continuing operations and other

comprehensive income

(loss), as applicable. The amount allocated to continuing operations is the income tax effect

of the pretax income or loss

from continuing operations that occurred during the year,

plus or minus income tax effects of (1) changes in certain

circumstances that cause a change in judgment about the realization of deferred tax assets in future

years, (2) changes in

income tax laws or rates, and (3) changes in income tax status, subject to certain exceptions.

The amount allocated to other

comprehensive income (loss) is related solely to changes in the valuation allowance on items

that are normally accounted

for in other comprehensive income (loss) such as unrealized gains or losses on available

-for-sale securities.

In accordance with ASC 740,

Income Taxes

, a tax position is recognized as a benefit only if it is “more likely than not” that

the tax position would be sustained in a tax examination, with a tax examination being presumed

to occur. The amount

recognized is the largest amount of tax benefit that is greater than 50% likely of

being realized on examination. For tax

positions not meeting the “more likely than not” test, no tax benefit is recorded.

It is the Company’s policy to recognize

interest and penalties related to income tax matters in income tax expense. The Company and

its wholly-owned subsidiaries

file consolidated Federal and State of Alabama income tax returns.

Fair Value Measurements

ASC 820,

Fair Value

Measurements,

which defines fair value, establishes a framework for measuring fair value in U.S.

generally accepted accounting principles and expands disclosures about fair value

measurements. ASC 820 applies only to

fair-value measurements that are already required or

permitted by other accounting standards.

The definition of fair value

focuses on the exit price, i.e., the price that would be received to sell an asset or paid to transfer a liability

in an orderly

transaction between market participants at the measurement date,

not the entry price, i.e., the price that would be paid to

acquire the asset or received to assume the liability at the measurement date. The statement

emphasizes that fair value is a

market-based measurement; not an entity-specific measurement. Therefore,

the fair value measurement should be

determined based on the assumptions that market participants

would use in pricing the asset or liability.

For more

information related to fair value measurements, please refer to Note 14, Fair

Value.

NOTE 2: BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average

common shares outstanding for

the year.

Diluted net earnings per share reflect the potential dilution that could occur upon

exercise of securities or other

rights for, or convertible into, shares of the Company’s

common stock.

As of December 31, 2023 and 2022, respectively,

the Company had no such securities or other rights issued or outstanding, and therefore,

no dilutive effect to consider for

the diluted net earnings per share calculation.

The basic and diluted net earnings per share computations for the respective years are

presented below.

Year ended December 31

(Dollars in thousands, except share and per share data)

2023

2022

Basic and diluted:

Net earnings

1,395

10,346

Weighted average common

shares outstanding

3,498,030

3,510,869

Net earnings per share

0.40

2.95

NOTE 3: VARIABLE

INTEREST ENTITIES

Generally, a variable interest entity (“VIE”)

is a corporation, partnership, trust or other legal structure that does not have

equity investors with substantive or proportional voting rights or has equity investors

that do not provide sufficient financial

resources for the entity to support its activities.

At December 31, 2023, the Company did not have any consolidated VIEs and

had one nonconsolidated VIE, which is

discussed below.

New Markets Tax

Credit Investment

The New Markets Tax Credit

(“NMTC”) program provides federal tax incentives to investors to make investments in

distressed communities and promotes economic improvement through the development

of successful businesses in these

communities.

The NMTC is available to investors over seven years and is subject to recapture if certain events occur

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during such period.

The Company had one NMTC investment with a balance of

$1.7 million and $

2.1

million at

December 31, 2023 and 2022, respectively,

which is included in other assets in the Company’s

consolidated balance sheets

as a VIE. While the Company’s investment

exceeds 50% of the outstanding equity interests in this VIE, the Company does

not consolidate the VIE because the Company lacks the power to direct the activities of the

VIE, and therefore is not a

primary beneficiary of the VIE.

(Dollars in thousands)

Maximum

Loss Exposure

Asset Recognized

Classification

Type:

New Markets Tax Credit investment

1,708

Other assets

NOTE 4: SECURITIES

At December 31, 2023 and 2022, respectively,

all securities within the scope of ASC 320,

Investments – Debt and Equity

Securities

were classified as available-for-sale.

The fair value and amortized cost for securities available-for-sale by

contractual maturity at December 31, 2023 and 2022, respectively,

are presented below.

1 year

1 to 5

5 to 10

After 10

Fair

Gross Unrealized

Amortized

(Dollars in thousands)

or less

years

Value

Gains

Losses

Cost

December 31, 2023

Agency obligations (a)

331

10,339

43,209

—

53,879

—

8,195

62,074

Agency MBS (a)

15,109

22,090

161,058

198,289

—

27,838

226,127

State and political subdivisions

—

9,691

9,051

18,742

2,731

21,472

Total available-for-sale

363

25,448

74,990

170,109

270,910

38,764

309,673

December 31, 2022

Agency obligations (a)

4,935

50,746

69,936

—

125,617

—

15,826

141,443

Agency MBS (a)

—

7,130

27,153

183,877

218,160

—

33,146

251,306

State and political subdivisions

300

642

15,130

45,455

61,527

5,681

67,197

Total available-for-sale

5,235

58,518

112,219

229,332

405,304

54,653

459,946

(a) Includes securities issued by U.S. government agencies or government sponsored

entities.

Expected lives of

these securities may differ from contractual maturities because (i)

issuers may have the right to call or repay such securities

obligations with or without prepayment penalties and (ii) loans included in Agency MBS

generally have the right to prepay

such loans in whole or in part at any time.

Securities with aggregate fair values of $

211.8

million and $

208.3

million at December 31, 2023 and 2022, respectively,

were pledged to secure public deposits, securities sold under agreements to repurchase,

FHLB advances, and for other

purposes required or permitted by law.

Included in other assets on the accompanying consolidated balance sheets are nonmarketable

equity investments.

The

carrying amounts of nonmarketable equity investments were $

1.4

million and $

1.2

million at December 31, 2023 and 2022,

respectively.

Nonmarketable equity investments include FHLB-Atlanta

stock, Federal Reserve Bank stock, and stock in a

privately held financial institution.

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Fair Value

and Gross Unrealized Losses

The fair values and gross unrealized losses on securities at December 31,

2023 and 2022, respectively, segregated

by those

securities that have been in an unrealized loss position for less than 12 months and 12

months or more are presented below.

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

December 31, 2023:

Agency obligations

—

53,879

8,195

53,879

8,195

Agency MBS

198,223

27,837

198,289

27,838

State and political subdivisions

793

14,408

2,729

15,201

2,731

Total

859

266,510

38,761

267,369

38,764

December 31, 2022:

Agency obligations

55,931

4,161

69,687

11,665

125,618

15,826

Agency MBS

70,293

5,842

147,867

27,304

218,160

33,146

State and political subdivisions

44,777

2,176

13,043

3,505

57,820

5,681

Total

171,001

12,179

230,597

42,474

401,598

54,653

For the securities in the

previous table, the Company

considers the severity of

the unrealized loss

as well as the Company’s

intent to

hold the

securities to

maturity or

the recovery

of the

cost basis.

Unrealized losses

have not

been recognized

into

income

as the decline in

fair value is largely

due to changes in

interest rates and other

market conditions.

For the securities

in the

previous table,

as of

December 31,

2023, management

does not

intend to

sell and

it is

likely that

management will

not be required to sell the securities prior to their anticipated recovery.

Agency Obligations

Investments

agency

obligations

are

guaranteed

full

and

timely

payments

the

issuing

agency.

Based

management's

analysis

and

judgement,

there

were

credit

losses attributable

the

Company’s

investments

agency obligations at December 31, 2023.

Agency MBS

Investments in

agency MBS

are issued

by Ginnie

Mae, Fannie

Mae, and

Freddie Mac.

Each of

these agencies

provide

guarantee of full and timely

payments of principal and

interest by the issuing agency.

Based on management's analysis

and

judgement, there were no credit losses attributable to the Company’s

investments in agency MBS at December 31, 2023.

State and Political Subdivisions

Investments

state

and

political

subdivisions

are

securities

issued

various municipalities

the

United

States.

The

majority

the

portfolio was

rated

higher,

with

securities

rated

below

investment

grade

December

31,

2023.

Based

management's

analysis

and

judgement,

there

were

credit

losses

attributable

the

Company’s

investments in state and political subdivisions at December 31, 2023.

Realized Gains and Losses

The following table presents the gross realized gains and losses on sales related to securities.

(Dollars in thousands)

2023

2022

Gross realized gains

Gross realized losses

(6,296)

(36)

Realized gains, net

(6,295)

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100

NOTE 5: LOANS AND ALLOWANCE

FOR CREDIT LOSSES

December 31

(In thousands)

2023

2022

Commercial and industrial

73,374

66,212

Construction and land development

68,329

66,479

Commercial real estate:

Owner occupied

66,783

61,125

Hotel/motel

39,131

33,378

Multifamily

45,841

41,084

Other

135,552

128,986

Total commercial real estate

287,307

264,573

Residential real estate:

Consumer mortgage

60,545

45,370

Investment property

56,912

52,278

Total residential real estate

117,457

97,648

Consumer installment

10,827

9,546

Total loans, net of unearned income

557,294

504,458

Loans secured by real estate were approximately

84.9

% of the total loan portfolio at December 31, 2023.

At December 31,

2023, the Company’s geographic loan

distribution was concentrated primarily in Lee County,

Alabama and surrounding

areas.

The loan portfolio segment is defined as the level at which an entity develops and documents

a systematic method for

determining its allowance for credit losses. As part of the Company’s

quarterly assessment of the allowance, the loan

portfolio is disaggregated into the following portfolio segments:

commercial and industrial, construction and land

development, commercial real estate, residential real estate and consumer installment. Where

appropriate, the Company’s

loan portfolio segments are further disaggregated into classes. A class is generally determined

based on the initial

measurement attribute, risk characteristics of the loan, and an entity’s

method for monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio

segments and classes.

Commercial and industrial (“C&I”) —

includes loans to finance business operations, equipment purchases, or

other needs

for small and medium-sized commercial customers. Also included

in this category are loans to finance agricultural

production.

Generally, the primary source of repayment

is the cash flow from business operations and activities of the

borrower.

Construction and land development (“C&D”) —

includes both loans and credit lines for the purpose of purchasing,

carrying and developing land into commercial developments or residential subdivisions.

Also included are loans and lines

for construction of residential, multi-family and commercial buildings. Generally the primary

source of repayment is

dependent upon the sale or refinance of the real estate collateral.

Commercial real estate

(“CRE”) —

includes loans disaggregated in these classes:

Owner occupied

– includes loans secured by business facilities to finance business operations, equipment and

owner-occupied facilities primarily for small and medium-sized commercial customers.

Generally the primary source

of loan repayment are the cash flows from the business operations and activities of the

borrower, who owns the

property.

Hotel/motel

– includes loans for hotels and motels.

Generally, the primary source

of repayment is dependent upon

income generated from the real estate collateral.

The underwriting of these loans takes into consideration the

occupancy and rental rates, as well as the financial health of the borrower.

Multifamily

– primarily includes loans to finance income-producing multi-family properties. Loans in this class

include

loans for 5 or more unit residential property and apartments leased to residents. Generally,

the primary source of

repayment is dependent upon income generated from the real estate collateral. The

underwriting of these loans takes

into consideration the occupancy and rental rates, as well as the financial health of the borrower.

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101

Other

– primarily includes loans to finance income-producing commercial properties.

Loans in this class include loans

for neighborhood retail centers, medical and professional offices, single retail

stores, industrial buildings, and

warehouses leased generally to local businesses and residents. Generally,

the primary source of repayment is dependent

upon income generated from the real estate collateral. The underwriting of these loans takes into consideration

the

occupancy and rental rates as well as the financial health of the borrower.

Residential real estate (“RRE”) —

includes loans disaggregated into two classes:

Consumer mortgage

– primarily includes first or second lien mortgages and home equity lines to consumers

that are

secured by a primary residence or second home. These loans are underwritten in accordance

with the Bank’s general

loan policies and procedures which require, among other things, proper documentation of each borrower’s

financial

condition, satisfactory credit history and property value.

Investment property

– primarily includes loans to finance income-producing 1-4 family residential properties.

Generally, the primary source of repayment is dependent

upon income generated from leasing the property securing the

loan. The underwriting of these loans takes into consideration the rental rates as well as

the financial health of the

borrower.

Consumer installment —

includes loans to individuals both secured by personal property and unsecured.

Loans include

personal lines of credit, automobile loans, and other retail loans.

These loans are underwritten in accordance with the

Bank’s general loan policies and procedures

which require, among other things, proper documentation of each borrower’s

financial condition, satisfactory credit history,

and if applicable, property value.

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102

The following is a summary of current, accruing past due and nonaccrual loans by portfolio

class as of December 31, 2023

and 2022.

Accruing

Total

30-89 Days

Greater than

Accruing

Non-

Total

(In thousands)

Current

Past Due

90 days

Loans

Accrual

Loans

December 31, 2023:

Commercial and industrial

73,108

266

—

73,374

—

73,374

Construction and land development

68,329

—

68,329

—

68,329

Commercial real estate:

Owner occupied

66,000

—

66,000

783

66,783

Hotel/motel

39,131

—

39,131

—

39,131

Multifamily

45,841

—

45,841

—

45,841

Other

135,552

—

135,552

—

135,552

Total commercial real estate

286,524

—

286,524

783

287,307

Residential real estate:

Consumer mortgage

60,442

—

60,442

103

60,545

Investment property

56,597

290

—

56,887

56,912

Total residential real estate

117,039

290

—

117,329

128

117,457

Consumer installment

10,781

—

10,827

—

10,827

Total

555,781

602

—

556,383

911

557,294

December 31, 2022:

Commercial and industrial

65,764

—

65,769

443

66,212

Construction and land development

66,479

—

66,479

—

66,479

Commercial real estate:

Owner occupied

61,125

—

61,125

—

61,125

Hotel/motel

33,378

—

33,378

—

33,378

Multifamily

41,084

—

41,084

—

41,084

Other

126,870

—

126,870

2,116

128,986

Total commercial real estate

262,457

—

262,457

2,116

264,573

Residential real estate:

Consumer mortgage

45,160

—

45,198

172

45,370

Investment property

52,278

—

52,278

—

52,278

Total residential real estate

97,438

—

97,476

172

97,648

Consumer installment

9,506

—

9,546

—

9,546

Total

501,644

—

501,727

2,731

504,458

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103

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories

similar to the

standard asset classification system used by the federal banking agencies.

The following table presents credit quality

indicators for the loan portfolio segments and classes by year of origination as of December

31, 2023. These categories are

utilized to develop the associated allowance for credit losses using historical losses adjusted

for qualitative and

environmental factors and are defined as follows:

●

Pass – loans which are well protected by the current net worth and paying capacity of the

obligor (or guarantors, if

any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

●

Special Mention – loans with potential weakness that may,

if not reversed or corrected, weaken the credit or

inadequately protect the Company’s position

at some future date. These loans are not adversely classified and do

not expose an institution to sufficient risk to warrant an adverse classification.

●

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes

debt repayment,

even though they are currently performing. These loans are characterized by the distinct possibility

that the

Company may incur a loss in the future if these weaknesses are not corrected.

●

Nonaccrual – includes loans where management has determined that full payment

of principal and interest is not

expected.

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104

(Dollars in thousands)

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total

Loans

December 31, 2023:

Commercial and industrial

Pass

1,187

334

2,220

22,152

2,363

44,780

73,113

Special mention

—

Substandard

—

206

—

261

Nonaccrual

—

Total commercial and industrial

1,187

334

2,220

22,152

2,569

44,835

73,374

Current period gross charge-offs

—

151

—

164

Construction and land development

Pass

6,771

13,326

11,461

11,070

4,329

20,758

614

68,329

Special mention

—

Substandard

—

Nonaccrual

—

Total construction and land development

6,771

13,326

11,461

11,070

4,329

20,758

614

68,329

Current period gross charge-offs

—

Commercial real estate:

Owner occupied

Pass

4,705

9,514

14,684

3,405

33,343

—

65,690

Special mention

—

260

—

260

Substandard

—

Nonaccrual

—

783

—

783

Total owner occupied

4,705

9,514

14,684

3,405

34,436

—

66,783

Current period gross charge-offs

—

Hotel/motel

Pass

—

1,423

7,364

8,428

3,938

17,978

—

39,131

Special mention

—

Substandard

—

Nonaccrual

—

Total hotel/motel

—

1,423

7,364

8,428

3,938

17,978

—

39,131

Current period gross charge-offs

—

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105

��

(Dollars in thousands)

2023

2022

2021

2020

2019

Prior to

2019

Revolving

Loans

Total

Loans

December 31, 2023:

Multi-family

Pass

—

8,292

6,765

151

30,552

—

45,841

Special mention

—

Substandard

—

Nonaccrual

—

Total multi-family

—

8,292

6,765

151

30,552

—

45,841

Current period gross charge-offs

—

Other

Pass

3,225

5,234

20,796

27,979

5,771

72,393

—

135,398

Special mention

—

Substandard

154

—

154

Nonaccrual

—

Total other

3,379

5,234

20,796

27,979

5,771

72,393

—

135,552

Current period gross charge-offs

—

Residential real estate:

Consumer mortgage

Pass

5,624

7,483

13,500

4,332

2,427

22,164

3,890

59,420

Special mention

249

—

190

—

495

Substandard

160

—

209

—

527

Nonaccrual

—

103

Total consumer mortgage

6,033

7,567

13,603

4,388

2,636

22,428

3,890

60,545

Current period gross charge-offs

—

Investment property

Pass

9,358

11,630

10,299

5,252

910

16,352

2,521

56,322

Special mention

—

Substandard

—

233

—

248

524

Nonaccrual

—

Total investment property

9,358

11,863

10,342

5,252

910

16,418

2,769

56,912

Current period gross charge-offs

—

Consumer installment

Pass

728

2,466

1,227

6,210

—

10,718

Special mention

—

Substandard

—

Nonaccrual

—

Total consumer installment

740

2,518

1,227

6,255

—

10,827

Current period gross charge-offs

—

105

Total loans

Pass

26,262

44,245

84,174

103,128

24,521

264,530

7,102

553,962

Special mention

249

—

509

—

841

Substandard

314

317

113

415

148

248

1,580

Nonaccrual

—

866

—

911

Total loans

26,825

44,562

84,332

103,236

24,936

266,053

7,350

557,294

Total current period gross charge-offs

151

—

269

Table of Contents

106

(In thousands)

Pass

Special

Mention

Substandard

Accruing

Nonaccrual

Total loans

December 31, 2022

Commercial and industrial

65,550

212

443

66,212

Construction and land development

66,479

—

66,479

Commercial real estate:

Owner occupied

60,726

238

161

—

61,125

Hotel/motel

33,378

—

33,378

Multifamily

41,084

—

41,084

Other

126,700

170

—

2,116

128,986

Total commercial real estate

261,888

408

161

2,116

264,573

Residential real estate:

Consumer mortgage

44,172

439

587

172

45,370

Investment property

51,987

248

—

52,278

Total residential real estate

96,159

482

835

172

97,648

Consumer installment

9,498

—

9,546

Total

499,574

898

1,255

2,731

504,458

The following table is a summary of the Company’s

nonaccrual loans by major categories as of December 31, 2023 and

2022.

CECL

Incurred Loss

December 31, 2023

December 31, 2022

Nonaccrual

Total

Loans with

Loans with an

Nonaccrual

(Dollars in thousands)

No Allowance

Allowance

Loans

Commercial and industrial

—

443

Commercial real estate

783

—

783

2,116

Residential real estate

—

128

172

Total

783

128

911

2,731

The Company did not recognize any interest income on nonaccrual loans during 2023.

The Company designates individually evaluated loans on nonaccrual status as collateral

-dependent loans, as well as other

loans that management of the Company designates as having higher risk.

Collateral-dependent loans are loans for which

the repayment is expected to be provided substantially through the operation or

sale of the collateral and the borrower is

experiencing financial difficulty.

These loans do not share common risk characteristics and are not included within the

collectively evaluated loans for determining the allowance for credit losses.

Under CECL, for collateral-dependent loans,

the Company has adopted the practical expedient to measure the allowance

for credit losses based on the fair value of

collateral.

The allowance for credit losses is calculated on an individual loan basis based

on the shortfall between the fair

value of the loan’s collateral, which is adjusted for

liquidation costs/discounts, and amortized costs.

If the fair value of the

collateral exceeds the amortized cost, no allowance is required.

The following table presents the amortized cost basis of collateral dependent loans, which

are individually evaluated to

determine expected credit losses:

(Dollars in thousands)

Real Estate

Total Loans

December 31, 2023:

Commercial real estate

783

Total

783

The gross interest income which would have been recorded under the original terms of

those nonaccrual loans had they

been accruing interest, amounted to approximately $

thousand and $

thousand for the years ended December 31, 2023

and 2022, respectively.

Table of Contents

107

Allowance for Credit Losses

The Company adopted ASC 326 on January 1, 2023, which introduced the CECL

methodology for estimating all expected

losses over the life of a financial asset.

Under the CECL methodology,

the allowance for credit losses is measured on a

collective basis for pools of loans with similar risk characteristics, and for loans that do

not share similar risk characteristics

with the collectively evaluated pools, evaluations are performed on an individual

basis.

The following table details the changes in the allowance for credit losses by portfolio

segment for the years ended

December 31, 2023 and 2022.

(in thousands)

Commercial

and industrial

Construction

and land

Development

Commercial

Real Estate

Residential

Real Estate

Consumer

Installment

Total

Balance, December 31, 2021

857

518

2,739

739

4,939

Charge-offs

(222)

—

(70)

(292)

Recoveries

—

118

Net (charge-offs) recoveries

(215)

—

(8)

(174)

Provision

105

431

347

1,000

Balance, December 31, 2022

747

949

3,109

828

132

5,765

Impact of adopting ASC 326

532

(17)

873

(347)

(22)

1,019

Charge-offs

(164)

—

(105)

(269)

Recoveries

204

—

223

Net recoveries (charge-offs)

—

(100)

(46)

Provision

(31)

(61)

138

125

Balance, December 31, 2023

1,288

960

3,921

546

148

6,863

The following table presents an analysis of the allowance for loan losses and recorded

investment in loans by portfolio

segment and impairment methodology as of December 31, 2022, as determined, prior

to adoption of ASC 326.

Collectively evaluated (1)

Individually evaluated (2)

Total

Allowance

Recorded

Allowance

Recorded

Allowance

Recorded

for loan

investment

for loan

investment

for loan

investment

(In thousands)

losses

in loans

losses

in loans

losses

in loans

December 31, 2022:

Commercial and industrial

688

65,769

443

747

66,212

Construction and land

development

949

66,479

—

949

66,479

Commercial real estate

2,663

262,457

446

2,116

3,109

264,573

Residential real estate

828

97,648

—

828

97,648

Consumer installment

132

9,546

—

132

9,546

Total

5,260

501,899

505

2,559

5,765

504,458

(1) Represents loans collectively evaluated for impairment

prior to the adoption of ASC 326, in accordance with

ASC 450-20,

Loss

Contingencies,

and pursuant to amendments by ASU 2010-20 regards allowance

for non-impaired loans.

(2) Represents loans individually evaluated for impairment,

prior to adoption of ASC 326,

in accordance with ASC 310-30,

Receivables

pursuant to amendments by ASU 2010-20 regarding allowance

for impaired loans.

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108

Impaired loans

The following tables present impaired loans at December 31, 2022 as determined under

ASC 310 prior to the adoption of

ASC 326.

Loans that have been fully charged-off are not included in the following

table. The related allowance generally

represents the following components which correspond to impaired loans:

●

Individually evaluated impaired loans equal to or greater than $500 thousand secured

by real estate (nonaccrual

construction and land development, commercial real estate, and residential real estate).

●

Individually evaluated impaired loans equal to or greater than $250 thousand not secured

by real estate

(nonaccrual commercial and industrial and consumer loans).

The following table sets forth certain information regarding the Company’s

impaired loans that were individually evaluated

for impairment at December 31, 2022.

December 31, 2022

(In thousands)

Unpaid

principal

balance (1)

Charge-offs

and payments

applied (2)

Recorded

investment (3)

allowance

With no allowance recorded:

Commercial and industrial

210

(1)

209

—

Commercial real estate:

Owner occupied

858

(3)

855

—

Total commercial real estate

858

(3)

855

—

Total

1,068

(4)

1,064

—

With allowance recorded:

Commercial and industrial

234

—

234

Commercial real estate:

Owner occupied

1,261

—

1,261

446

Total commercial real estate

1,261

—

1,261

446

Total

1,495

—

1,495

505

Total

impaired loans

2,563

(4)

2,559

505

(1) Unpaid principal balance represents the contractual obligation

due from the customer.

(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well

as interest payments that have been

applied against the outstanding principal balance subsequent

to the loans being placed on nonaccrual status.

(3) Recorded investment represents the unpaid principal balance

less charge-offs and payments applied; it is shown before

any related allowance for loan losses.

Pursuant to the adoption of ASU 2022-02, effective January 1, 2023,

the Company prospectively discontinued the

recognition and measurement guidance previously required for

troubled debt restructurings (TDRs).

As of December 31,

2023, the Company had no loans that would have previously required disclosure

as TDRs.

Table of Contents

109

The following table provides the average recorded investment in impaired loans, if

any, by portfolio

segment, and the

amount of interest income recognized on impaired loans after impairment by portfolio

segment and class for the year ended

December 31, 2022 as determined under ASC 310 prior to adoption of ASC 326.

Year ended December 31, 2022

Average recorded

Total interest

(In thousands)

investment

income recognized

Impaired loans:

Commercial and industrial

—

Commercial real estate:

Owner occupied

163

—

Other

153

—

Total commercial real estate

316

—

Residential real estate:

Investment property

—

Total residential real estate

—

Total

355

—

NOTE 6: PREMISES AND EQUIPMENT

Premises and equipment at December 31, 2023 and 2022 is presented below.

December 31

(Dollars in thousands)

2023

2022

Land and improvements

12,800

12,788

Buildings and improvements

35,442

35,241

Furniture, fixtures, and equipment

3,986

3,861

Construction in progress

Total premises and equipment

52,267

51,929

Less:

accumulated depreciation

(6,732)

(5,354)

Premises and equipment, net

45,535

46,575

Depreciation expense was approximately $

1.4

million and $

1.2

million for the years ended December 31, 2023 and 2022,

respectively, and is a component of

net occupancy and equipment expense in the consolidated statements of earnings.

NOTE 7: MORTGAGE SERVICING

RIGHTS, NET

MSRs are recognized

based on the

fair value of

the servicing rights

on the date

the corresponding mortgage

loans are sold.

estimate

the

Company’s

MSRs

determined

using

assumptions

that

market

participants

would

use

estimating

future net

servicing income,

including estimates

of prepayment

speeds, discount

rate, default

rates, cost

to service,

escrow

account earnings,

contractual servicing

fee income,

ancillary income,

and late

fees.

Subsequent to

the date

of transfer,

the

Company

has

elected

measure

its

MSRs

under

the

amortization

method.

Under

the

amortization

method,

MSRs

are

amortized in proportion

to, and over

the period of,

estimated net servicing

income. Servicing

fee income is

recorded net

related amortization expense and recognized in earnings as part of mortgage lending

income.

The Company has recorded MSRs related to loans sold without recourse

to Fannie Mae.

The Company generally sells

conforming, fixed-rate, closed-end, residential mortgages to Fannie Mae.

MSRs are included in other assets on the

accompanying consolidated balance sheets.

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110

The Company evaluates MSRs for impairment on a quarterly basis.

Impairment is determined by stratifying MSRs into

groupings based on predominant risk characteristics, such as interest rate and loan type.

If, by individual stratum, the

carrying amount of the MSRs exceeds fair value, a valuation allowance is established.

The valuation allowance is adjusted

as the fair value changes.

Changes in the valuation allowance are recognized in earnings as a component

of mortgage

lending income.

The following table details the changes in amortized MSRs and the related valuation allowance for

the years ended

December 31, 2023 and 2022.

Year ended December 31

(Dollars in thousands)

2023

2022

Beginning balance

1,151

1,309

Additions, net

111

Amortization expense

(197)

(269)

Ending balance

992

1,151

Valuation

allowance included in MSRs, net:

Beginning of period

—

End of period

—

Fair value of amortized MSRs:

Beginning of period

2,369

1,908

End of period

2,382

2,369

Data and assumptions used in the fair value calculation related to MSRs at December

31, 2023 and 2022, respectively,

are

presented below.

December 31

(Dollars in thousands)

2023

2022

Unpaid principal balance

216,648

234,349

Weighted average prepayment

speed (CPR)

6.0

7.6

Discount rate (annual percentage)

10.5

9.5

Weighted average coupon

interest rate

3.5

3.4

Weighted average remaining

maturity (months)

245

256

Weighted average servicing

fee (basis points)

25.0

At December 31, 2023, the weighted average amortization period

for MSRs was

7.5

years.

Estimated amortization expense

for each of the next five years is presented below.

(Dollars in thousands)

December 31, 2023

2024

126

2025

112

2026

100

2027

2028

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111

NOTE 8:

DEPOSITS

At December 31, 2023, the scheduled maturities of certificates of deposit and other time

deposits are presented below.

(Dollars in thousands)

December 31, 2023

2024

166,433

2025

13,456

2026

3,410

2027

12,695

2028

2,221

Thereafter

—

Total certificates of deposit and

other time deposits

198,215

Additionally, at December 31,

2023 and 2022, approximately $

97.6

million and $

57.4

million, respectively, of certificates

of deposit and other time deposits were issued in denominations greater than $250

thousand.

At December 31, 2023 and 2022, the amount of deposit accounts in overdraft status that were

reclassified to loans on the

accompanying consolidated balance sheets was not material.

NOTE 9: LEASE COMMITMENTS

We lease certain office

facilities and equipment under operating leases. Rent expense for all

operating leases totaled $

0.2

million for both years ended December 31, 2023 and 2022.

Aggregate lease right of use assets were $

485

thousand and

588

thousand at December 31, 2023 and 2022, respectively.

Aggregate lease liabilities were $

509

thousand and $

611

thousand at December 31, 2023 and 2022, respectively.

Rent expense includes amounts related to items that are not

included in the determination of lease right of use assets including expenses related

to short-term leases totaling $

0.1

million for the year ended December 31, 2023.

Lease payments under operating leases that were applied to our operating lease liability totaled

123

thousand during the

year ended December 31, 2023. The following table reconciles future undiscounted

lease payments due under non-

cancelable operating leases (those amounts subject to recognition) to the aggregate operating lease

liability as of December

31, 2023.

(Dollars in thousands)

Future lease

payments

2024

123

2025

114

2026

2027

2028

Thereafter

Total undiscounted operating

lease liabilities

551

Imputed interest

Total operating lease liabilities

included in the accompanying consolidated balance sheets

509

Weighted-average lease terms

in years

5.01

Weighted-average discount rate

3.20

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112

NOTE 10:

OTHER COMPREHENSIVE LOSS

Comprehensive income

is defined

as the

change in

equity from

all transactions

other than

those with

stockholders,

and

includes net earnings and other

comprehensive loss.

Other comprehensive loss

for the years ended

December 31, 2023 and

2022, is presented below.

Pre-tax

Tax benefit

Net of

(Dollars in thousands)

amount

(expense)

tax amount

2023:

Unrealized net holding gain on securities

9,584

(2,407)

7,177

Reclassification adjustment for net loss on securities recognized in net earnings

6,295

(1,581)

4,714

Other comprehensive income

15,879

(3,988)

11,891

2022:

Unrealized net holding loss on securities

(55,819)

14,017

(41,802)

Reclassification adjustment for net gain on securities recognized in net earnings

(12)

(9)

Other comprehensive loss

(55,831)

14,020

(41,811)

NOTE 11:

INCOME TAXES

For the years ended December 31, 2023 and 2022 the components of income tax expense

from continuing operations are

presented below.

Year ended December 31

(Dollars in thousands)

2023

2022

Current income tax (benefit) expense:

Federal

(448)

1,461

State

(134)

356

Total current income tax (benefit) expense

(582)

1,817

Deferred income tax (benefit) expense:

Federal

(293)

556

State

130

Total deferred

income tax (benefit) expense

(195)

686

Total income tax (benefit) expense

(777)

2,503

Table of Contents

113

Total income tax expense differs

from the amounts computed by applying the statutory federal income tax rate of 21%

earnings before income taxes.

A reconciliation of the differences for the years ended December 31,

2023 and 2022, is

presented below.

2023

2022

Percent of

pre-tax

(Dollars in thousands)

Amount

earnings

Amount

earnings

Earnings before income taxes

618

12,849

Income taxes at statutory rate

130

21.0

2,698

21.0

Tax-exempt interest

(493)

(79.8)

(523)

(4.1)

State income taxes, net of

federal tax effect

(43)

(7.0)

346

2.7

New Markets Tax Credit

(356)

(57.6)

(356)

(2.8)

Bank-owned life insurance

(88)

(14.2)

141

1.1

Other

11.9

197

1.6

Total income tax (benefit) expense

(777)

(125.7)

2,503

19.5

At December 31, 2023 and 2022, the Company had a net deferred tax asset of $10.3

million and $13.8 million, respectively,

included in other assets on the consolidated balance sheet.

The tax effects of temporary differences that

give rise to

significant portions of the deferred tax assets and deferred tax liabilities at December

31, 2023 and 2022 are presented

below.

December 31

(Dollars in thousands)

2023

2022

Deferred tax assets:

Allowance for credit losses

1,724

1,448

Unrealized loss on securities

9,734

13,722

Net operating loss carry-forwards

253

—

Tax credit carry-forwards

356

—

Accrued bonus

185

228

Right of use liability

128

153

Other

Total deferred

tax assets

12,451

15,621

Deferred tax liabilities:

Premises and equipment

1,315

767

Originated mortgage servicing rights

249

289

Right of use asset

122

148

New Markets Tax Credit investment

181

179

Other

332

469

Total deferred

tax liabilities

2,199

1,852

Net deferred tax asset

10,252

13,769

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available

evidence, it is more-likely-

than-not that some portion of the entire deferred tax asset will not be realized.

The ultimate realization of deferred tax

assets is dependent upon the generation of future taxable income during the periods

in which those temporary differences

become deductible.

Management considers the scheduled reversal of deferred tax liabilities,

projected future taxable

income and tax planning strategies in making this assessment. Based upon the level of historical

taxable income and

projection for future taxable income over the periods which the temporary differences

resulting in the remaining deferred

tax assets are deductible, management believes it is more-likely-than

-not that the Company will realize the benefits of these

deductible differences at December 31, 2023.

The amount of the deferred tax assets considered realizable, however,

could

be reduced in the near term if estimates of future taxable income are reduced.

Table of Contents

114

The change in the net deferred tax asset for the years ended December 31, 2023

and 2022, is presented

below.

Year ended December 31

(Dollars in thousands)

2023

2022

Net deferred tax asset (liability):

Balance, beginning of year

13,769

435

Cumulative effect of change in accounting standard

276

—

Deferred tax expense related to continuing operations

195

(686)

Stockholders' equity, for accumulated

other comprehensive income

(3,988)

14,020

Balance, end of year

10,252

13,769

ASC 740,

Income Taxes,

defines the threshold for recognizing the benefits of tax return positions in the financial statements

as “more-likely-than-not” to be sustained by the taxing authority.

This section also provides guidance on the de-

recognition, measurement, and classification of income tax uncertainties in interim

periods.

As of December 31, 2023, the

Company had no unrecognized tax benefits related to federal or state income tax matters.

The Company does not anticipate

any material increase or decrease in unrecognized tax benefits during 2024

relative to any tax positions taken prior to

December 31, 2023.

As of December 31, 2023, the Company has accrued no interest and no penalties related to uncertain

tax positions.

It is the Company’s policy to recognize interest

and penalties related to income tax matters in income tax

expense.

The Company and its subsidiaries file consolidated U.S. federal and State of Alabama income

tax returns.

The Company is

currently open to audit under the statute of limitations by the Internal Revenue Service and the State of

Alabama for the

years ended December 31, 2020 through 2023.

NOTE 12:

EMPLOYEE BENEFIT PLAN

The Company sponsors a qualified defined contribution retirement plan, the Auburn National

Bancorporation, Inc. 401(k)

Plan (the "Plan").

Eligible employees may contribute up to 100% of eligible compensation, subject to statutory

limits upon

completion of 2 months of service.

Furthermore, the Company allows employer Safe Harbor contributions. Participants

are

immediately vested in employer Safe Harbor contributions. The

Company's matching contributions on behalf of

participants were equal to $1.00 for each $1.00 contributed by participants, up to 3% of

each participant's

eligible

compensation, and $0.50 for every $1.00 contributed by participants, above 3% up to 5%

of each participant's

eligible

compensation, for a maximum matching contribution of 4% of the participants' eligible

compensation. Company matching

contributions to the Plan were approximately $

0.3

million for the years ended December 31, 2023 and 2022, respectively,

and are included in salaries and benefits expense.

NOTE 13:

COMMITMENTS AND CONTINGENT LIABILITIES

Credit-Related Financial Instruments

The Company is party to credit related financial instruments with off

-balance sheet risk in the normal course of business to

meet the financing needs of its customers.

These financial instruments include commitments to extend credit and standby

letters of credit.

Such commitments involve, to varying degrees, elements of credit and interest rate

risk in excess of the

amount recognized in the consolidated balance sheets.

The Company’s exposure to credit

loss is represented by the contractual amount of these commitments.

The Company

follows the same credit policies in making commitments as it does for on-balance sheet

instruments.

At December 31, 2023 and 2022, the following financial instruments were outstanding

whose contract amount represents

credit risk.

December 31

(Dollars in thousands)

2023

2022

Commitments to extend credit

73,606

87,657

Standby letters of credit

629

1,041

Table of Contents

115

Commitments to extend credit are agreements to lend to a customer provided there is no violation

of any condition

established in the commitment agreement and provided the commitments are

not otherwise cancelable by the Bank.

Commitments generally have fixed expiration dates or other termination clauses

and may require payment of a fee.

The

commitments for lines of credit may expire without being drawn upon.

Therefore, total commitment amounts do not

necessarily represent future cash requirements.

The amount of collateral obtained, if it is deemed necessary by the

Company, is based on management’s

credit evaluation of the customer.

The Company records an allowance for credit

losses on off-balance sheet exposures, unless the commitments to extend credit

are unconditionally cancelable, through a

charge to provision for credit losses in the Company’s

Consolidated Statement of Earnings, prior to the adoption of ASC

326, changes in the allowance were recorded as a component of other noninterest expense.

The allowance for credit losses

related to unfunded commitments was $

0.3

million and $

0.2

million at December 31, 2023 and 2022, respectively,

and is

included in other liabilities on the Company’s

Consolidated Balance Sheet.

See “Note 1: Summary of Significant

Accounting Policies – Allowanace for credit losses –

Unfunded commitments.”

Standby letters of credit are conditional commitments issued by the Company to

guarantee the performance of a customer

to a third party.

The credit risk involved in issuing letters of credit is essentially the same

as that involved in extending loan

facilities to customers.

The Company holds various assets as collateral, including accounts receivable,

inventory,

equipment, marketable securities, and property to support those commitments

for which collateral is deemed necessary.

The Company has a recorded a liability for the estimated fair value of these standby letters

of credit in the amount of $

thousand and $

thousand at December 31, 2023 and 2022, respectively.

Contingent Liabilities

The Company and the Bank are involved in various legal proceedings, arising in connection

with their business.

In the

opinion of management, based upon consultation with legal counsel, the ultimate resolution

of these proceedings will not

have a material adverse effect upon the consolidated financial

condition or results of operations of the Company and the

Bank.

NOTE 14: FAIR VALUE

Fair Value

Hierarchy

“Fair value” is defined by ASC 820,

Fair Value

Measurements and Disclosures

, as the price that would be received to sell

an asset or paid to transfer a liability in an orderly transaction occurring in the principal market

(or most advantageous

market in the absence of a principal market) for an asset or liability at the measurement date.

GAAP establishes a fair

value hierarchy for valuation inputs that gives the highest priority to quoted prices

in active markets for identical assets or

liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1—inputs to the valuation methodology are quoted prices, unadjusted, for identical

assets or liabilities in active

markets.

Level 2—inputs to the valuation methodology include quoted prices

for similar assets and liabilities in active markets,

quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that

are observable for the

asset or liability, either directly or

indirectly.

Level 3—inputs to the valuation methodology are unobservable and reflect the

Company’s own assumptions about the

inputs market participants would use in pricing the asset or liability.

Level changes in fair value measurements

Transfers between levels of the fair value hierarchy are generally

recognized at the end of the reporting period.

The

Company monitors the valuation techniques utilized for each category of

financial assets and liabilities to ascertain when

transfers between levels have been affected.

The nature of the Company’s financial assets

and liabilities generally is such

that transfers in and out of any level are expected to be infrequent. For the years ended December

31, 2023 and 2022, there

were no transfers between levels and no changes in valuation techniques for the Company’s

financial assets and liabilities.

Table of Contents

116

Assets and liabilities measured at fair value on a recurring

basis

Securities available-for-sale

Fair values of securities available for sale were primarily measured using

Level 2 inputs.

For these securities, the Company

obtains pricing from third party pricing services.

These third-party pricing services consider observable data

that may

include broker/dealer quotes, market spreads, cash flows, market consensus prepayment

speeds, benchmark yields, reported

trades for similar securities, credit information and the securities’ terms and conditions.

On a quarterly basis, management

reviews the pricing

received from the third-party pricing services for reasonableness given

current market conditions.

part of its review, management

may obtain non-binding third party broker quotes to validate the fair value measurements.

In addition, management will periodically submit pricing provided by the third-party

pricing services to another

independent valuation firm on a sample basis.

This independent valuation firm will compare the price provided

by the

third-party pricing service with its own price and will review the significant assumptions

and valuation methodologies used

with management.

The following table presents the balances of the assets and liabilities measured at fair value

on a recurring as of December

31, 2023 and 2022, respectively,

by caption, on the accompanying consolidated balance sheets by ASC 820 valuation

hierarchy (as described above).

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

December 31, 2023:

Securities available-for-sale:

Agency obligations

53,879

—

53,879

—

Agency MBS

198,289

—

198,289

—

State and political subdivisions

18,742

—

18,742

—

Total securities available-for-sale

270,910

—

270,910

—

Total

assets at fair value

270,910

—

270,910

—

December 31, 2022:

Securities available-for-sale:

Agency obligations

125,617

—

125,617

—

Agency MBS

218,160

—

218,160

—

State and political subdivisions

61,527

—

61,527

—

Total securities available-for-sale

405,304

—

405,304

—

Total

assets at fair value

405,304

—

405,304

—

Assets and liabilities measured at fair value on a nonrecurring

basis

Collateral Dependent Loans

Collateral dependent loans are measured at the fair value of the collateral securing loan less

estimated selling costs.

The

fair value of real estate collateral is determined based on real estate appraisals

which are generally based on recent sales of

comparable properties which are then adjusted for property specific factors.

Non-real estate collateral is valued based on

various sources, including third party asset valuations and internally determined

values based on cost adjusted for

depreciation and other judgmentally determined discount factors.

Collateral dependent loans are classified within Level 3

of the hierarchy due to the unobservable inputs used in determining their fair

value such as collateral values and the

borrower’s underlying financial condition.

Table of Contents

117

Mortgage servicing rights, net

Mortgage servicing rights, net, included in other assets on the accompanying consolidated

balance sheets, are carried at the

lower of cost or estimated fair value.

MSRs do not trade in an active market with readily observable prices.

To determine

the fair value of MSRs, the Company engages an independent third party.

The independent third party’s

valuation model

calculates the present value of estimated future net servicing income using assumptions

that market participants would use

in estimating future net servicing income, including estimates of prepayment speeds, discount

rate, default rates, cost to

service, escrow account earnings, contractual servicing fee income, ancillary

income, and late fees.

Periodically, the

Company will review broker surveys and other market research to validate significant

assumptions used in the model.

The

significant unobservable inputs include prepayment speeds or the constant prepayment

rate (“CPR”) and the weighted

average discount rate.

Because the valuation of MSRs requires the use of significant unobservable inputs, all of the

Company’s MSRs are classified

within Level 3 of the valuation hierarchy.

Table of Contents

118

The following table presents the balances of the assets and liabilities measured at fair value

on a nonrecurring basis as of

December 31, 2023 and 2022, respectively,

by caption, on the accompanying consolidated balance sheets and by

ASC 820

valuation hierarchy (as described above):

Quoted Prices in

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Dollars in thousands)

Amount

(Level 1)

(Level 2)

(Level 3)

December 31, 2023:

Loans, net

(1)

783

—

783

Other assets

(2)

992

—

992

Total assets at fair value

1,775

—

1,775

December 31, 2022:

Loans, net

(3)

2,054

—

2,054

Other assets

(2)

1,151

—

1,151

Total assets at fair value

3,205

—

3,205

(1)

Loans considered collateral dependent under ASC 326

(2)

Represents MSRs, net carried at lower of cost or estimated fair value.

(3)

Loans considered impaired under ASC 310-10-35 Receivables, prior to the adoption

of ASC 326. This amount reflects

the recorded investment in impaired loans, net of any related allowance for loan losses.

Quantitative Disclosures for Level 3 Fair Value

Measurements

At December 31, 2023 and 2022, the Company had no Level 3 assets measured at fair value on a

recurring basis.

For Level

3 assets measured at fair value on a non-recurring basis as of December 31,

2023 and 2022, the significant unobservable

inputs used in the fair value measurements are presented below.

Weighted

Carrying

Significant

Average

(Dollars in thousands)

Amount

Valuation Technique

Unobservable Input

Range

of Input

December 31, 2023:

Collateral dependent loans

783

Appraisal

Appraisal discounts

10.0

Mortgage servicing rights, net

992

Discounted cash flow

Prepayment speed or CPR

5.9

10.6

6.0

Discount rate

10.5

12.5

10.5

December 31, 2022:

Impaired loans

2,054

Appraisal

Appraisal discounts

10.0

Mortgage servicing rights, net

1,151

Discounted cash flow

Prepayment speed or CPR

5.2

18.6

7.6

Discount rate

9.5

11.5

9.5

Fair Value

of Financial Instruments

ASC 825,

Financial Instruments

, requires disclosure of fair value information about financial instruments,

whether or not

recognized on the face of the balance sheet, for which it is practicable to estimate that

value. The assumptions used in the

estimation of the fair value of the Company’s

financial instruments are explained below.

Where quoted market prices are

not available, fair values are based on estimates using discounted cash flow analyses. Discounted

cash flows can be

significantly affected by the assumptions used, including the discount rate

and estimates of future cash flows. The

following fair value estimates cannot be substantiated by comparison to independent

markets and should not be considered

representative of the liquidation value of the Company’s

financial instruments, but rather are good faith estimates of the fair

value of financial instruments held by the Company.

ASC 825 excludes certain financial instruments and all nonfinancial

instruments from its disclosure requirements.

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119

The following methods and assumptions were used by the Company in estimating the

fair value of its financial instruments:

Loans, net

Fair values for loans were calculated using discounted cash flows. The discount rates reflected

current rates at which similar

loans would be made for the same remaining maturities. Expected

future cash flows were projected based on contractual

cash flows, adjusted for estimated prepayments.

The fair value of loans was measured using an exit price notion.

Time Deposits

Fair values for time deposits were estimated using discounted cash flows. The discount

rates were based on rates currently

offered for deposits with similar remaining maturities.

The carrying value, related estimated fair value, and placement in the fair value hierarchy

of the Company’s financial

instruments at December 31, 2023 and 2022 are presented below.

This table excludes financial instruments for which the

carrying amount approximates fair value.

Financial assets for which fair value approximates carrying value included

cash

and cash equivalents.

Financial liabilities for which fair value approximates carrying value included

noninterest-bearing

demand deposits, interest-bearing demand deposits, and savings deposits.

Fair value approximates carrying value in these

financial liabilities due to these products having no stated maturity.

Additionally, financial liabilities

for which fair value

approximates carrying value included overnight borrowings

such as federal funds purchased and securities sold under

agreements to repurchase.

The following table summarizes our fair value estimates:

Fair Value Hierarchy

Carrying

Estimated

Level 1

Level 2

Level 3

(Dollars in thousands)

amount

fair value

inputs

Inputs

December 31, 2023:

Financial Assets:

Loans, net (1)

550,431

526,372

—

526,372

Financial Liabilities:

Time Deposits

198,215

195,171

—

195,171

—

December 31, 2022:

Financial Assets:

Loans, net (1)

498,693

484,007

—

484,007

Financial Liabilities:

Time Deposits

150,375

150,146

—

150,146

—

(1) Represents loans, net and the allowance for credit losses.

The fair value of loans was measured using

an exit price notion.

NOTE 15: RELATED PARTY

TRANSACTIONS

The Bank has made, and expects in the future to continue to make in the ordinary course

of business, loans to directors and

executive officers of the Company,

the Bank, and their immediate families and affiliates.

These persons, corporations, and

firms have had transactions in the ordinary course of business with the Company and

Bank, including borrowings, all of

which management believes were on substantially the same terms, including interest

rates and collateral, as those prevailing

at the time of comparable tranactions with unaffiliated persons and did

not involve more than the normal risk of

collectability or present other unfavorable features.

A summary of such outstanding loans is presented below:

(Dollars in thousands)

Amount

Loans outstanding at December 31, 2022

1,646

New loans/advances

567

Repayments

(316)

Loans outstanding at December 31, 2023

1,897

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120

During 2023 and 2022, certain executive officers,

directors and principal shareholders’ of the Company and the Bank,

including companies and related parties with which they are affiliated,

were deposit customers of the bank.

Total deposits

for these persons at December 31, 2023 and 2022 amounted to $

21.1

million and $

22.8

million, respectively.

NOTE 16: REGULATORY

RESTRICTIONS AND CAPITAL

RATIOS

As required by the Economic Growth, Regulatory Relief, and Consumer Protection

Act of 2018, the Federal Reserve Board

issued rule that expanded applicability of the Board’s

small bank holding company policy statement (the “Small BHC

Policy Statement”) and has been added as Appendix C to Federal Reserve Regulation Y.

These increased the Small BHC

Policy Statement’s asset limit from $1

billion to $3 billion in total consolidated assets for a bank holding company or

savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2)

does not conduct

significant off-balance sheet activities; and (3) does not have a material amount of

debt or equity securities, other than trust-

preferred securities, outstanding that are registered with the SEC. The interim

final rule provides that, if warranted for

supervisory purposes, the Federal Reserve may exclude a company from this asset

level increase. The Federal Reserve has

treated the Company as a small bank holding company for purposes of the Small BHC Policy Statement

and therefore has

considered only the Bank’s capital and not the

Company’s consolidated capital.

The Bank remains subject to regulatory capital requirements of the Alabama

Banking Department and the Federal Reserve.

Failure to meet minimum capital requirements can initiate certain mandatory

- and possibly additional discretionary -

actions by regulators that, if undertaken, could have a direct material effect

on the Company’s financial

statements. Under

capital adequacy guidelines and the regulatory framework for prompt corrective action, the

Bank must meet specific capital

guidelines that involve quantitative measures of their assets, liabilities and certain off

-balance sheet items as calculated

under regulatory accounting practices. The capital amounts and classification are

also subject to qualitative judgments by

the regulators about components, risk weightings, necessary capital to support

risks and other factors.

Notwithstanding the

minimum capital requirements, Federal Reserve Regulation Q states that a Federal Reserve

-regulated institution must

maintain capital commensurate with the level and nature of all risks to which such institution

is exposed.

Federal Reserve Regulation Q limits “distributions” and discretionary bonus

payments from eligible retained income” by

sate member banks, such as the Bank, unless its capital conservation buffer

of common equity Tier 1 capital (“CET1”)

exceeds 2.5%. “Distributions” include dividends declared or paid on common stock, and stock

repurchases, redemptions or

repurchases of Tier 2 capital instruments (unless replaced

by a capital instrument in the same quarter). “Eligible retained

income” for the Bank and other Federal Reserve regulated institutions is the greater

of:

(A) The Board-regulated institution's net income, calculated in accordance

with the instructions to the institution’s FR Y–

9C or Call Report, for the four calendar quarters preceding the current calendar quarter,

net of any distributions and

associated tax effects not already reflected in net income; and

(B) The average of the Board-regulated institution’s

net income, calculated in accordance with the instructions to the

institutions’ FR Y–9C or Call Report, as applicable, for the four calendar quarters

preceding the current calendar quarter.

The Bank’s Call Report is used for its calculation

of “eligible retained income”.

As of December 31, 2023, the Bank is “well capitalized” under the regulatory framework

for prompt corrective action. To

be categorized as “well capitalized,” the Bank must maintain minimum common equity Tier

1, total risk-based, Tier 1 risk-

based, and Tier 1 leverage ratios as set forth in the

following table. Management has not received any notification from the

Bank's regulators that changes the Bank’s regulatory

capital status.

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121

The actual capital amounts and ratios for the Bank and the aforementioned minimums as

of December 31, 2023 and 2022

are presented below.

Minimum for capital

Minimum to be

Actual

adequacy purposes

well capitalized

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

At December 31, 2023:

Tier 1 Leverage Capital

103,886

9.72

42,732

4.00

53,415

5.00

Common Equity Tier 1 Capital

103,886

14.52

32,194

4.50

46,503

6.50

Tier 1 Risk-Based Capital

103,886

14.52

42,926

6.00

57,234

8.00

Total Risk-Based Capital

111,035

15.52

57,234

8.00

71,543

10.00

At December 31, 2022:

Tier 1 Leverage Capital

106,886

10.01

42,716

4.00

53,394

5.00

Common Equity Tier 1 Capital

106,886

15.39

31,252

4.50

45,142

6.50

Tier 1 Risk-Based Capital

106,866

15.39

41,669

6.00

55,559

8.00

Total Risk-Based Capital

112,851

16.25

55,559

8.00

69,449

10.00

Dividends paid by the Bank are a principal source of funds available to the Company for

payment of dividends to its

stockholders and for other needs which are restricted by Alabama and Federal law and regulations

as described above.

Capital adequacy considerations could further limit the availability of dividends

from the Bank. At December 31, 2023, the

Bank could have declared additional dividends of approximately $

8.2

million without prior approval of regulatory

authorities.

As a result of this limitation, approximately $

68.3

million of the Company’s investment in the Bank

was

restricted from transfer in the form of dividends.

NOTE 17: AUBURN NATIONAL

BANCORPORATION

(PARENT COMPANY)

The Parent Company’s condensed balance sheets

and related condensed statements of earnings and cash flows are as

follows.

CONDENSED BALANCE SHEETS

December 31

(Dollars in thousands)

2023

2022

Assets:

Cash and due from banks

1,277

1,700

Investment in bank subsidiary

74,857

65,967

Other assets

523

522

Total assets

76,657

68,189

Liabilities:

Accrued expenses and other liabilities

150

148

Total liabilities

150

148

Stockholders' equity

76,507

68,041

Total liabilities and stockholders'

equity

76,657

68,189

Table of Contents

122

CONDENSED STATEMENTS

OF EARNINGS

Year ended December 31

(Dollars in thousands)

2023

2022

Income:

Dividends from bank subsidiary

3,776

3,719

Noninterest income

Total income

3,784

3,797

Expense:

Noninterest expense

239

326

Total expense

239

326

Earnings before income tax expense and equity

in undistributed earnings of bank subsidiary

3,545

3,471

Income tax benefit

(30)

(48)

Earnings before equity in undistributed earnings

of bank subsidiary

3,575

3,519

Equity in (distributed) undistributed earnings of bank subsidiary

(2,180)

6,827

Net earnings

1,395

10,346

CONDENSED STATEMENTS

OF CASH FLOWS

Year ended December 31

(Dollars in thousands)

2023

2022

Cash flows from operating activities:

Net earnings

1,395

10,346

Adjustments to reconcile net earnings to net cash

provided by operating activities:

Net (increase) decrease in other assets

(1)

108

Net increase (decrease) in other liabilities

(408)

Equity in (distributed) undistributed earnings of bank subsidiary

2,180

(6,827)

Net cash provided by operating activities

3,582

3,219

Cash flows from financing activities:

Dividends paid

(3,776)

(3,720)

Stock repurchases

(229)

(504)

Net cash used in financing activities

(4,005)

(4,224)

Net change in cash and cash equivalents

(423)

(1,005)

Cash and cash equivalents at beginning of period

1,700

2,705

Cash and cash equivalents at end of period

1,277

1,700

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123

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND

FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange

Act”), the Company’s

management, under the supervision and with the participation of its principal executive

and principal financial officer,

conducted an evaluation as of the end of the period covered by this report, of the effectiveness

of the Company’s disclosure

controls and procedures as defined in Rule 13a-15(e) under the Exchange

Act. Based on that evaluation, and the results of

the audit process described below,

the Chief Executive Officer and Chief Financial Officer

concluded that the Company’s

disclosure controls and procedures were effective to ensure that information

required to be disclosed in the Company’s

reports under the Exchange Act is recorded, processed, summarized and reported

within the time periods specified in the

SEC’s rules and regulations, and that such information

is accumulated and communicated to the Company’s

management,

including the Chief Executive Officer and the Chief Financial Officer,

as appropriate, to allow timely decisions regarding

disclosure.

Management’s Report on Internal Control

Over Financial Reporting

The Company’s management

is responsible for establishing and maintaining adequate internal control over

financial

reporting. The Company’s internal

control system was designed to provide reasonable assurance to the Company’s

management and board of directors regarding the preparation and fair presentation of published

financial statements. All

internal control systems, no matter how well designed, have inherent limitations.

Therefore, even those systems determined

to be effective can provide only reasonable assurance

with respect to financial statement preparation and presentation.

Under the direction of the Company’s Chief Executive

Officer and Chief Financial Officer,

management has assessed the

effectiveness of the Company’s

internal control over financial reporting as of December 31, 2023 in accordance

with the

criteria set forth by the Committee of Sponsoring Organizations of the Treadway

Commission (“COSO”) in Internal

Control – Integrated Framework (2013). Based on this assessment, management

has concluded that such internal control

over financial reporting was effective as of December 31,

2023.

This annual report does not include an attestation report of the Company’s

independent registered public accounting firm

regarding internal control over financial reporting because it is a smaller reporting company.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there has not been any change in the Company’s

internal controls over financial

reporting that has materially affected, or is reasonably likely to

materially affect, the Company’s

internal controls over

financial reporting.

ITEM 9B.

OTHER INFORMATION

None.

ITEM 9C.

DISCLOSURE REGARDING FORGEIN JURISDICTIONS THAT

PREVENT INSPECTION

None.

Table of Contents

124

PART

III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is set forth under the headings “Proposal

One: Election of Directors - Information about

Nominees for Directors,” and “Executive Officers,” “Additional

Information Concerning the Company’s

Board of

Directors and Committees,” “Executive Compensation,” “Audit Committee

Report” and “Compliance with Section 16(a) of

the Securities Exchange Act of 1934” in the Proxy Statement, and is incorporated herein by reference.

The Board of Directors has adopted a Code of Conduct and Ethics applicable to the Company’s

directors, officers and

employees, including the Company’s principal executive

officer, principal

financial and principal accounting officer,

controller and other senior financial officers. The Code of Conduct and Ethics,

as well as the charters for the Audit

Committee, Compensation Committee, and the Nominating and

Corporate Governance Committee, can be found by

hovering over the heading “About Us” on the Company’s

website,

www.auburnbank.com

, and then clicking on “Investor

Relations”, and then clicking on “Governance Documents”.

In addition, this information is available in print to any

shareholder who requests it. Written requests

for a copy of the Company’s Code of Conduct and Ethics

or the Audit

Committee, Compensation Committee, or Nominating and Corporate

Governance Committee Charters may be sent to

Auburn National Bancorporation, Inc., 100 N. Gay Street, Auburn, Alabama 36830,

Attention: Marla Kickliter, Senior Vice

President of Compliance and Internal Audit. Requests may also be

made via telephone by contacting Marla Kickliter,

Senior Vice President of Compliance

and Internal Audit, or Laura Carrington, Vice

President of Human Resources, at

(334) 821-9200.

ITEM 11.

EXECUTIVE COMPENSATION

Information required by this item is set forth under the headings “Additional Information

Concerning the Company’s Board

of Directors and Committees – Board Compensation,” and “Executive Officers”

in the Proxy Statement, and is incorporated

herein by reference.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDER

MATTERS

Information required by this item is set forth under the headings “Proposal

One: Election of Directors - Information about

Nominees for Directors and Executive Officers” and “Stock

Ownership by Certain Persons” in the Proxy Statement, and is

incorporated herein by reference.

ITEM 13. CERTAIN

RELATIONSHIPS

AND RELATED

TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information required by this item is set forth under the headings “Additional Information

Concerning the Company’s Board

of Directors and Committees – Committees of the Board of Directors –

Independent Directors Committee” and “Certain

Transactions and Business Relationships” in the Proxy Statement,

and is incorporated herein by reference.

ITEM 14.

PRINCIPAL ACCOUNTING FEES

AND SERVICES

Information required by this item is set forth under the heading “Independent Public

Accountants” in the Proxy Statement,

and is incorporated herein by reference.

Table of Contents

125

PART

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT

SCHEDULES

(a)

List of all Financial Statements

The following consolidated financial statements and report of independent registered

public accounting firm of the

Company are included in this Annual Report on Form 10-K:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2023 and 2022

Consolidated Statements of Earnings for the years ended December 31,

2023 and 2022

Consolidated Statements of Comprehensive Income for the years ended December

31, 2023 and 2022

Consolidated Statements of Stockholders’ Equity for the years ended December

31, 2023 and 2022

Consolidated Statements of Cash Flows for the years ended December 31,

2023 and

2022

Notes to the Consolidated Financial Statements

(b)

Exhibits

3.1.

Certificate of Incorporation of Auburn National Bancorporation, Inc. (incorporated by reference from

Registrant's Form 10-Q dated June 30, 2002 (File No. 000-26486)).

3.2.

Amended and Restated Bylaws of Auburn National Bancorporation, Inc., adopted as of November 13, 2007

(incorporated by reference from Registrant’s Form 10-K dated March 31, 2008 (File No. 000-26486)).

4.1.

Description of the Registrant’s Securities

21.1

Subsidiaries of Registrant

31.1

Certification signed by the Chief Executive Officer pursuant to SEC Rule 13a-14(a).

31.2

Certification signed by the Chief Financial Officer pursuant to SEC Rule 13a-14(a).

32.1

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley

Act of 2002 by David A. Hedges, President and Chief Executive Officer *

32.2

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley

Act of 2002 by W. James Walker, IV, Senior Vice President and Chief Financial Officer.*

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension

Schema Document

101.CAL

Inline XBRL Taxonomy Extension

Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension

Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension

Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension

Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101

The certifications attached as exhibits 32.1 and 32.2 to this annual report on Form 10-K are

“furnished” to the Securities

and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley

Act of 2002 and shall not be deemed “filed”

by the Company for purposes of Section 18 of the Securities Exchange Act of 1934,

as amended.

Table of Contents

126

(c)

Financial Statement Schedules

All financial statement schedules required pursuant to this item were either included

in the financial information set

forth in (a) above or are inapplicable and therefore have been omitted.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,

the registrant has duly caused

this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the

City of Auburn, State of

Alabama, on March 14, 2024.

AUBURN NATIONAL

BANCORPORATION,

INC.

(Registrant)

By:

/S/ DAVID

A. HEDGES

David A. Hedges

President and CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report

has been signed below by the following

persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/S/ DAVID

A. HEDGES

David A. Hedges

President and Chief Executive Officer

(Principal Executive Officer)

March 14, 2024

/S/ W.

JAMES WALKER,

James Walker,

SVP,

Chief Financial Officer

(Principal Financial and Accounting Officer)

March 14, 2024

/S/ ROBERT W.

DUMAS

Robert W.

Dumas

Chairman of the Board

March 14, 2024

/S/ C. WAYNE

ALDERMAN

C. Wayne Alderman

Director

March 14, 2024

/S/ TERRY W.

ANDRUS

Terry W.

Andrus

Director

March 14, 2024

/S/ J. TUTT BARRETT

J. Tutt Barrett

Director

March 14, 2024

/S/ LAURA J. COOPER

Laura Cooper

Director

March 14, 2024

/S/ WILLIAM F. HAM,

JR.

William F.

Ham, Jr.

Director

March 14, 2024

/S/ DAVID

E. HOUSEL

David E. Housel

Director

March 14, 2024

/S/ ANNE M. MAY

Anne M. May

Director

March 14, 2024

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Auburn National Bancorporation (AUBN) 10-K2023 FY Annual report

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